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- We can calculate the Walleye Feeders fair market value using the discounted cashflow (DCF) method. This method calculates the present value of all future free cash flows using the company’s weighted-average cost of capital (WACC) as the discount rate.
The first step is to determine the terminal value for the company at the close of 2015. This represents its value beyond the projected period. We can do this using the Gordon Growth Model. This assumes free cash flows will increase at the expected rate.
Terminal value = (FCF2015 * (1+g)) / (WACC – g)
FCF2015 = $54 Million, g = 12.5%, and WACC = 14.4%
Terminal value = ($54 * (1+0.125)) / (0.14 – 0.125) = $1,038 million
We can then calculate the current value of the terminal using WACC for the discount rate
PV of terminal value = Terminal Value / (1+WACC).3
$1,038 / (1+0.14)3 = 702 Million
We can now calculate the value of free cash flow for 2013 and 2014, as well as 2015
PV of FCF2013 = -20 / (1+0.14)1= -$18 Million PV of FLCF2014 = $48/ (1+0.14)2= $38 Million PV of FCF2015 = $54/ (1+0.14)3= $39,000,000 PV of FCF2015 = 54% / (1+0.14)3= $39,000,000
Finally, to calculate the fair market value at 2012’s end we need to add the current value of all the cashflows and the terminal value.
Fair Market Value = PVof FCF2013+ PVof FCF2014+ PVof FCF2015+ PVof FCF2015+ PV of Terminal Value = –$18 + $38+ $39 + 702 = $711 millions
- To estimate the fair market value per share of Walleye Feeders’ equity, we need to subtract the market value of its interest-bearing liabilities from the fair market value of the company and divide by the number of shares outstanding.
Market value of equity = Fair market value – market value of liabilities = $711 – $55 = $656 million
Fair market value = Market value = Shares outstanding = $656/50 = $13.12 Per Share
