Question

Wilbur and Orville are brothers.​ They're both serious​ investors, but they have different approaches to valuing stocks.​ Wilbur, the older​ brother, likes to use the dividend valuation model. Orville prefers the free cash flow to equity valuation model. As it turns​ out, right​ now, both of them are looking at the same stock long dash —Wright First​ Aerodynmaics, Inc.​ (WFA). The company has been listed on the NYSE for over 50 years and is widely regarded as a​ mature, rock-solid,​ dividend-paying stock. The brothers have gathered the following information about​ WFA's stock:

Current dividend ​( D 0​) equals =​$2.20​/share

Current free cash flow ​( FCF0​) equals =​$ 1.0 million

Expected growth rate of dividends and cash flows ​(g​) equals = 7​%

Required rate of return ​(r​) equals = 13​%

Shares outstanding equals = 550,000 shares

How would Wilbur and Orville each value this​ stock?

The stock price from​ Wilbur's valuation is ​$___ . ​(Round to the nearest​ cent.)

The stock price from​ Orville's valuation is ​$____. ​(Round to the nearest​ cent)

Answer 1

Under Constant growth dividend model, Stock Price can be calculated with following equation -

Where,

P0 = Current Stock Price

D0 = Current dividend

k = required rate of return

g = growth rate

Provided,

D0 = $2.20

k = 13%

g = 7%

Putting the values -

Stock Price from Wilbur's valuation is $39.23

Using Free cash flow model we can calculate value of Equity with following equation -

Putting the values -

And,

Putting the values -

Stock price from Orville's valuation is $32.42

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.