You expect DM Corporation to generate the following free cash flows over the next five years as shown in the table below.
Beginning with year 2017, you estimate that DM's free cash flows will grow at 6% per year . DM's equity cost of capital is 18% and its weighted average cost of capital is 15%.
a. What is the continuation value by the end of year 2016? (5)
b. What is the enterprise value of DM Corporation? (5)
c. What is the share price of DM Corporation if DM has $500 million of debt (no cash) and 14 million shares of stock outstanding? (5)
d. As part of the management’s business development strategy, in late 2011 DM initiated discussions on acquiring start up in the local areas. The expected FCF of the start up in 2012 is $-5 million, $10 million in 2013, and $45 million in 2014. The expected FCF growth rate is 10% beyond 2014. The startup is asking for a purchase price at $750 million. Should DM purchase the startup? What will happen to its stock price if it decides to do so? (10)
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