Reference no: EM132807321

Question 1 - Stock Valuation

Valeant Pharmaceuticals (VRX) has 187m shares outstanding, $26.7 billion in debt and $807m in cash. It projects free cash flows for next 2 years based on earnings forecasts below, a marginal tax rate of 24%, capital expenditures increasing from $175m in Year 1 to $190m by Year 2, and increases in net working capital (NWC) are based on a NWC-to-Sales ratio of 5% per year.

Forecasts ($m)  Year 0  Year 1  Year 2 

Sales  $10,287  $13,095  $14,117 

Growth vs Prior Year  27.3% 7.8%

Cost of Goods Sold  ($3,274) ($3,529)

Gross Profit  $9,822  $10,588 

Other Operating Expenses  ($262) ($282)

SG&A  ($2,619) ($2,823)

Depreciation  ($171) ($171)

EBIT  $6,770  $7,311 

(a) Determine VRX's free cash flow each year.

(b) Suppose VRX's free cash flow is expected to grow at 1% after Year 2. If VRX's weighted average cost of capital (WACC) is 16.7%, what is the value of VRX's stock?