Question

Assume a corporation is expecting the following cash flows in the future: $-5 million in year 1, $8 million in year 2, $22 million in year 3. After year 3, the cash flows are expected to grow at a rate of 6% forever. The discount rate is 11%, the firm has debt totaling $41 million, and 10 million shares outstanding. What should be the price per share for this company? Enter your answer in dollars, rounded to the nearest cent.

Answer 1

Step 1)

Year	Cash flow	PVF11%	Cash flow *PVF
1	-5000000	.90090	-4504500
2	8000000	.81162	6492960
3	22000000	.73119	16086180
Horizon value at year 3	466,400,000	.73119	341027016
Value of company			359,101,656

**Horizon value at year 3= CF3(1+g)/(rs-g)

                   = 22000000(1+.06)/(.11-.06)

                  = 22000000*1.06/.05

                   = 466,400,000

**Find present value factor from table at 11% or using the formula 1/(1+i)^n where n= 1,2,3 & i= 11%

Step 2)

Value of equity =value of firm -value of debt

                = 359,101,656- 41,000,000

                 = 318,101,656

step 3)Value per share= value of equity /number of shares outstanding

            = 318101656/10000000

           =$ 31.81 per share