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Brandtly Industries invests a large sum of money in R&D; as a result, it retains and reinvests all of its earnings. In other words, Brandtly does not pay any dividends, and it has no plans to pay dividends in the near future. A major pension fund is interested in purchasing Brandtly's stock. The pension fund manager has estimated Brandtly's free cash flows for the next 4 years as follows: $4 million, $7 million, $11 million, and $15 million. After the fourth year, free cash flow is projected to grow at a constant 6%. Brandtly's WACC is 10%, the market value of its debt and preferred stock totals $50 million; and it has 15 million shares of common stock outstanding. Write out your answers completely. For example, 13 million should be entered as 13,000,000. What is the present value of the free cash flows projected during the next 4 years? Round your answer to the nearest cent. Do not round your

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Answer:

Brandtly Industries

The present value of the free cash flows projected during the next 4 years is $27,924,000 in total, details for each year are below:

Explanation:

a) Data and Calculation of the Present Value of the Free Cash Flows:

Present Value of Projected Free Cash Flows

               Free Cash Flow       Discount Factor      PV

Year 1:     $4,000,000               0.909                    $3,636,000

Year 2:    $7,000,000               0.826                    $5,782,000

Year 3:   $11,000,000                0.751                     $8,261,000

Year 4:  $15,000,000               0.683                   $10,245,000

Total     $37,000,000                                           $27,924,000

b) To get the present value of the free cash flow for each year for  Brandtly Industries, we discounted the free cash flow with their discount factors from the present value table at 10%, which is the weighted average cost of capital as given in the question.

The summation of the present values gives the total free cash flows projected for the next four years.