Problem:
The second acquisition target is a privately held company in a growing industry. The target has recently borrrowed $40 million to finance its expansion; it has no other debt or preferred stock. It pays no dividends and currently has no marketable securities. KFS expects the company to produce free cash flows of -$5 million in 1 year, $10 million in two years, and $20 million in 3 years. After three years, free cash flow will grow at a rate of 6%. Its WACC is 10% and it currently has 10 million shares of stock.
(1) What is its horizon value (that is, its value of operations at Year 3)? What is its current value of operations (that is, at time zero)?
(2) What is its value of equity on a price per share basis?