A Three Stage FCFF Valuation Model with Declining Growth in Stage 2.
Charles Jones is evaluating Marathon Oil Company (NYSE: MRO) using a threestage growth model. He has accumulated the following information:
Current FCFF = $745 million
Outstanding shares = 309.39 million
Equity beta = 0.90, risk free rate = 5.04 percent, and equity risk premium = 5.5 percent
Cost of debt = 7.1 percent
Marginal tax rate = 34 percent
Capital structure = 20 percent debt, 80 percent equity
Long term debt = $1.5 18 billion
Growth rate of FCFF =
8.8 percent annually in Stage 1, Years 1 4
7.4 percent in Year 5,6.0 percent in Year 6,4.6 percent in Year 7
3.2 percent in Year 8 and thereafter
Using the information that Jones has accumulated, estimate the following:
1. WACC
2. Total value of the firm
3. Total value of equity
4. Value per share