Question

Assume that today is December 31, 2019, and that the following information applies to Abner Airlines:

After-tax operating income [EBIT(1 - T)] for 2020 is expected to be $500 million.
The depreciation expense for 2020 is expected to be $190 million.
The capital expenditures for 2020 are expected to be $225 million.
No change is expected in net operating working capital.
The free cash flow is expected to grow at a constant rate of 5% per year.
The required return on equity is 15%.
The WACC is 9%.
The firm has $202 million of non-operating assets.
The market value of the company's debt is $3.462 billion.
230 million shares of stock are outstanding.

Using the corporate valuation model approach, what should be the company's stock price today? Do not round intermediate calculations. Round your answer to the nearest cent.

$  

Answer 1

Step-1, Free Cash Flow (FCF)

Free Cash Flow (FCF) = Net Operating Profit After Tax(NOPAT) + Depreciation Expenses - Capital Expenditures – Changes in Net Working Capital

=EBIT(1 – Tax Rate) + Depreciation - Capital Expenditures – Changes in Net Working Capital

= $500 Million + $190 Million - $225 Million – $0 Million

= $465 Million

Step-2, Total Firm Value

Weighted Average Cost of Capital (WACC) = 9%

Growth Rate (g) = 5% per year

Therefore, the Total Firm Value = FCF / (WACC – g)

= $465 Million / (0.09 – 0.05)

= $465 Million / 0.04

= $11,625 Million

Step-3, Value of Common Equity

Value of Common Equity = Total Firm Value + Value of non-operating assets – Market Value of Debt

= $11,625 Million + $202 Million - $3,462 Million

= $8,365 Million

Step-4, Stock price today

The Stock price today = Value of Common Equity / Number of shares of common stock outstanding

= $8,365 Million / 230 Million common shares outstanding

= $36.37 per share

“Hence, the company's stock price today will be $36.37”