Assume a corporation is expecting the following cash flows in the future: $-9 million in year...

Assume a corporation is expecting the following cash flows in the future: $-9 million in year 1, $11 million in year 2, $23 million in year 3. After year 3, the cash flows are expected to grow at a rate of 6% forever. The discount rate is 13%, the firm has debt totaling $47 million, and 8 million shares outstanding. What should be the price per share for this company?

Expert Solution

Step-1:Calculation of total value of firm

As per discounted cash flow method, value of firm is the present value of cash flow.
(Amount in million)
Year	Cash flow	Discount factor	Present value of cash flow
a	b	c=1.13^-a	d=b*c
1	-9	0.884956	$ -7.96
2	11	0.783147	$ 8.61
3	23	0.69305	$ 15.94

	Total		$ 16.59

Present value of cash flow after year 3		=	CF3(1+g)/(Ke-g)DF3			Where,
		=	$ 241.38			CF3	Cash flow of year 3	23
						g	Growth in cash flow	6%
						Ke	Discount rate	13%
						DF3	Discount factor of year 3	0.69305

Value of firm		=	$ 16.59	+	$ 241.38
		=	$ 257.97	million

Step-2:Value of shares of common stock
			million
Value of firm			$ 257.97
Less value of debt			$ 47.00

Value of shares of common stock			$ 210.97

Step-3:Value of per share

Per share value		=	Value of total shares	/	Number of shares
		=	$ 210.97 million	/	8 million
		=	$ 26.37

So,price per share of company is $ 26.37

jeff jeffy answered 3 months ago

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