= + 0.06 = 11.30%. r
The terminal, or horizon, date is the date when the growth rate becomes constant. This occurs
at the end of Year 2.
The horizon, or terminal, value is the value at the horizon date of all dividends expected
thereafter. In this problem it is calculated as follows:
The firm’s intrinsic value is calculated as the sum of the present value of all dividends during the
supernormal growth period plus the present value of the terminal value. Using your financial
calculator, enter the following inputs: CF
= 0, CF
= 1.50, CF
= 1.80 + 37.80 = 39.60, I/YR =
10, and then solve for NPV = $34.09.
The firm’s free cash flow is expected to grow at a constant rate, hence we can apply a constant
growth formula to determine the total value of the firm.
Firm value = FCF
/(WACC – g)
= $150,000,000/(0.10 – 0.05)
To find the value of an equity claim upon the company (share of stock), we must subtract out the
market value of debt and preferred stock. This firm happens to be entirely equity funded, and this
step is unnecessary. Hence, to find the value of a share of stock, we divide equity value (or in this
case, firm value) by the number of shares outstanding.
Equity value per share
= Equity value/Shares outstanding