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)

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

jeff jeffy answered 2 months ago

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