Hey,
I have to calculate the ‘Current Market Value’ of a firm, and i’m only given this data:
Annual net free cash flows are $365000.
Risk-free interest rate is 6.25%pa.
Total book value of assets of $3.1m.
Standard deviation of firms stock return is 27%.
Cost of capital of 16% per year.
Shareholders represent a total of at least 55% of the equity.
Future Value of $1 invested in a similar firm with similar risk: $1.20 in good economy, $0.85 in bad economy.
Other company take over bid offer: $11m
My problem is, i thought Current Market Value = (Share Price * Number of Shares) + Debt. I think Debt is the book value of 3.1m, but i cant seem to find the price of the shares or how many there are to calculate the equity… Am i on the right track, or have i missed the point completly…? any help would be greatly appreciated.
Cheers
Richie
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“Market value of firm” is usually called “Enterprise value”. Enterprise value is Market Cap + Market value of Debt and other Interest Bearing Securities + Market value of other stakeholders (eg, minority interests, zero-coupon CBs, preferred shares) – cash.
You’re on the right path. The market value of debt is not necessarily book value, but for all companies except those at risk of default – it’s pretty close. You can see that teh future value of $1 invested is, even in bad years, only down 15%. This is telling me that they’re probably not a default risk (especially since they are a positive FCF spinner).