Question

The most recent free cash flow (FCF) for Golden Enterprises was $200 million, and the management expects the free cash flow to begin growing immediately at a 7% constant rate. The cost of capital is 12%.

i. Using the constant growth model, determine the value of operations for Golden Enterprises Inc.

Golden Enterprises Inc. balance sheet shows that it has $10 million short-term investments, $15 million in notes payable, $60 million in long-term bonds, and $15 million in preferred stock. Golden Enterprises has 60 million of shares outstanding. Calculate the following:

ii. total intrinsic value for Golden Enterprises Inc.

iii. intrinsic value of equity for Golden Enterprises Inc.

iii. intrinsic stock price per share for Golden Enterprises Inc.

(Note: I can find similar answer in Chegg already. However, the answers are not clear and complete. Please help to solve the question properly with clear steps.

Answer 1

To calculate the value of operations for Golden Enterprises Inc., we can use the constant growth model, also known as the Gordon Growth Model:

Value of Operations = FCF * (1 + Growth Rate) / (Cost of Capital - Growth Rate)

i. Using the given values:

FCF = $200 million

Growth Rate = 7%

Cost of Capital = 12%

Plugging these values into the formula:

Value of Operations = $200 million * (1 + 0.07) / (0.12 - 0.07)

= $200 million * 1.07 / 0.05

= $200 million * 21.4

= $4,280 million

Therefore, the value of operations for Golden Enterprises Inc. is $4,280 million.

ii. To calculate the total intrinsic value, we need to consider the value of operations along with the balance sheet items:

Total Intrinsic Value = Value of Operations + Short-term Investments - Notes Payable - Long-term Bonds - Preferred Stock

= $4,280 million + $10 million - $15 million - $60 million - $15 million

= $4,200 million

Therefore, the total intrinsic value of Golden Enterprises Inc. is $4,200 million.

iii. To calculate the intrinsic value of equity, we subtract the preferred stock from the total intrinsic value:

Intrinsic Value of Equity = Total Intrinsic Value - Preferred Stock

= $4,200 million - $15 million

= $4,185 million

Therefore, the intrinsic value of equity for Golden Enterprises Inc. is $4,185 million.

iv. To calculate the intrinsic stock price per share, we divide the intrinsic value of equity by the number of shares outstanding:

Intrinsic Stock Price per Share = Intrinsic Value of Equity / Number of Shares Outstanding

= $4,185 million / 60 million

= $69.75 per share

Therefore, the intrinsic stock price per share for Golden Enterprises Inc. is $69.75.