Question

In: Finance

A company is projected to have a free cash flow of $389 million next year, growing...

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)

Solutions

Expert Solution

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

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