Erwin Footwear wishes to assess the value of its Active Shoe Division. This division has debt with a market value of ¢12,500,000 and no preferred stock. Its weighted average cost of capital is 10%. The Active Shoe Division’s estimated free cash flow each year from 2013 through 2016 is given in the following table. Beyond 2016 to infinity, the firm expects its free cash flow to grow at 4% annually. Year Free Cash Flow (¢) 2013 800,000 2014 1,200,000 2015 1,400,000 2016 1,500,000 Use the free cash flow valuation model to estimate the value of Erwin’s entire Active Shoe Division. Use your finding in part (i) along with the data provided above to find this division’s common stock value. If the Active Shoe Division as a public company will have 500,000 shares outstanding, use your finding in part (ii) to calculate its value per share
Erwin Footwear wishes to assess the value of its Active Shoe Division. This division has debt with a market value of ¢12,500,000 and no preferred stock. Its weighted average cost of capital is 10%. The Active Shoe Division’s estimated free cash flow each year from 2013 through 2016 is given in the following table. Beyond 2016 to infinity, the firm expects its free cash flow to grow at 4% annually. Year Free Cash Flow (¢) 2013 800,000 2014 1,200,000 2015 1,400,000 2016 1,500,000 Use the free cash flow valuation model to estimate the value of Erwin’s entire Active Shoe Division. Use your finding in part (i) along with the data provided above to find this division’s common stock value. If the Active Shoe Division as a public company will have 500,000 shares outstanding, use your finding in part (ii) to calculate its value per share
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Erwin Footwear wishes to assess the value of its Active Shoe Division. This division has debt with a market value of ¢12,500,000 and no
|
Year |
Free Cash Flow (¢) |
|
2013 |
800,000 |
|
2014 |
1,200,000 |
|
2015 |
1,400,000 |
|
2016 |
1,500,000 |
- Use the free cash flow valuation model to estimate the value of Erwin’s entire Active Shoe Division.
- Use your finding in part (i) along with the data provided above to find this division’s common stock value.
- If the Active Shoe Division as a public company will have 500,000 shares outstanding, use your finding in part (ii) to calculate its value per share
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