You have just learned that B&B has undertaken a major expansion that will change its expected free cash flows to in -$10 million in 1 year, $20 million in 2 years, and $35 million in 3 years. After 3 years, free cash flow will grow at a rate of 5%. Debt is $200 million and preferred stock is $50 million. Assume the WACC is unchanged at 11% and that there are still 10 million shares of stock outstanding.
(1) What is the company’s horizon value (i.e., its value of operations at Year 3)? What is its current value of operations (i.e., at Time 0)?
(2) What is its estimated intrinsic value of equity on a price-per-share basis?