Team Valuation Problem

Valuation Problem

A minor league professional hockey team embarks on an aggressive facility expansion that requires additional capital. Management decides to finance the expansion by borrowing $40 million and halting dividend payments to increase retained earnings. The projected free cash flows are $5 million for the current year, $10 million for the following year, and $20 million for the third year. After the third year, free cash flow is projected to grow at a constant 6%. The overall cost of capital is 10%. What is the total value? If the company has 10 million shares of stock and $40 million total debt, what is the price per share? See pages 175–176. As shown in the table below, the free cash flows in perpetuity, leading to a value of $428 million. Subtracting $40 million in debt and dividing by ten million shares gives a per share price of $39. This assumes that in the future, on average, the free cash flows will be paid out as dividends (thus providing value to the shares of stock).

Enterprise value = Equity Value + Debt – cash $428 = 388 + 40

Notes:

Enterprise Value = Market Capitalization + Total Debt – Cash Coat of Debt is the borrowing rate x (1- tax rate) Cost of Equity under the CAPM = Risk Free Rate + (levered Beta x market risk premium) MRP = Expected Market Return on the S&P500 less the RFR Levered Beta = ULB x (1+ (1-tax rate) x debt/equity ratio)) Levered Beta is specific to the company, Unlevered Beta is specific to the sector WACC is the after tax cost of debt x % of debt to total capitalization plus the cost of equity x % of equity to total capitalization Terminal Value = Free Cash Flow / (WACC-Growth Rate)