In: Finance
A company is projected to have a free cash flow of $389 million next year, growing at a 5% rate until the end of year 3. After that, cash flows are expected to grow at a stable rate of 2.5% in perpetuity. The company's cost of capital is 8.3%. The company owes $106 million to lenders and has $7 million in cash. If it has 239 million shares outstanding, what is your estimate for its stock price? Round to one decimal place. (e.g., $4.32 = 4.3)
WACC= | 8.30% | ||||||
Year | Previous year FCF | FCF growth rate | FCF current year | Horizon value | Total Value | Discount factor | Discounted value |
1 | 0 | 0.00% | 389 | 389 | 1.083 | 359.1874 | |
2 | 389 | 5.00% | 408.45 | 408.45 | 1.172889 | 348.24267 | |
3 | 408.45 | 5.00% | 428.8725 | 7579.212 | 8008.0845 | 1.270238787 | 6304.39299 |
Long term growth rate (given)= | 2.50% | Value of Enterprise = | Sum of discounted value = | 7011.82 | |||
Where | |||||||
Current FCF =Previous year FCF*(1+growth rate)^corresponding year | |||||||
Unless FCF for the year provided | |||||||
Total value = FCF + horizon value (only for last year) | |||||||
Horizon value = FCF current year 3 *(1+long term growth rate)/( WACC-long term growth rate) | |||||||
Discount factor=(1+ WACC)^corresponding period | |||||||
Discounted value=total value/discount factor |
Enterprise value = Equity value+ MV of debt |
- Cash & Cash Equivalents |
7011.82 = Equity value+106-7 |
Equity value = 6912.82 |
share price = equity value/number of shares |
share price = 6912.82/239 |
share price = 28.92 |