Question

Danielsen's has 15,000 shares of stock outstanding and projected annual free cash flows of $48,200, $57,900, $71,300, and $72,500 for the next four years, respectively. After that, the cash flows are expected to increase at a constant annual rate of 1.6 percent. What is the current value per share of stock at a discount rate of 15.4 percent?

Answer 1

Terminal Value (TV)

Terminal Value (TV) = CF5(1 + g) / (Ke – g)

= $72,500(1 + 0.0160) / (0.1540 – 0.0160)

= $73,660 / 0.1380

= $533,768

Present Value of future cash inflows and the terminal value

Year	Cash Flow ($)	Present Value factor at 15.40%	Present Value of Free Cash Flow ($)
1	48,200	0.866551	41,768
2	57,900	0.750911	43,478
3	71,300	0.650703	46,395
4	72,500	0.563867	40,880
4	5,33,768	0.563867	3,00,974
TOTAL			4,73,495

The current value per share of stock

The current value per share of stock = Total Present value of future cash flows / Number of shares outstanding

= $4,73,495 / 15,000 shares outstanding

= $31.57 per share

“Therefore, the current value per share of stock will be $31.57 per share”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.