You estimate Bayleaf Inc. has free cash flows of $70 million arriving in 1 year, $74 million in 2 years, and $80 million in 3 years. After year 3, the long term growth rate of FCF will be 3% (thus year 4 FCF is $82.4 million). Bayleaf has $241 million in net debt and a weighted average cost of capital of 14%. What is your estimate of the Enterprise Value of Bayleaf (in millions)?

Question

03-12-2019
Business

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You estimate Bayleaf Inc. has free cash flows of $70 million arriving in 1 year, $74 million in 2 years, and $80 million in 3 years. After year 3, the long term growth rate of FCF will be 3% (thus year 4 FCF is $82.4 million). Bayleaf has $241 million in net debt and a weighted average cost of capital of 14%. What is your estimate of the Enterprise Value of Bayleaf (in millions)?

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truonghanhduyen truonghanhduyen · Answer 1 · 2019-12-03T09:05:14+01:00

Answer:

If no information of how many years expected for the FCF in Bayleaf, then I assume you expect FCF in 4 years only.

Then the Enterprise Value of Bayleaf is nil, since its valuation is negative of roughly $19,871.

However if we expect to have FCF in 20 years, in which the growth rate of FCF in year 4th is 3% year on year, then the valuation of Bay Leaf Inc. is roughly $347 million.

Explanation:

The valuation of enterprise is Net present value (NPV) of Free Cash Flow (FCF) minus its Net Debt

In the NPV, the discount rate is weighted average cost of capital (WACC); thus we can calculate NPV of FCF in Bayleaf by this function in excel = NPV(14%,70000,74000,80000) = $221,129,242

Then the valuation of company if considering FCF in 4 years is ($19,871)= NPV of FCF – Net Debt = $221,129,242 - $241,000,000

Please see excel attached for your details.