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Let's suppose that total market value of debt of WWW Inc is€2,000,000 and has 600,000...

Let's suppose that total market value of debt of WWW Inc is €2,000,000 and has 600,000 outstanding shares, and the weighted average cost of capital is 9% per annum. It is expected that the company's next year's free cash flow to firm wil be €250,000, and the estimated perpetual growth rate for FCFF (g) is at 4% per annum. According to the free cash flow to firm (FCFF) method, what is the theoretical price of stock per share of WWW Inc now (t=0). Please show your working.

Solutions

Expert Solution

Free cash flow to the firm (FCFF) represents the cash available for all the capital providers. This is available for bondholders and shareholders after doing investment and paying for cost of doing business.

The present value of the firm is equal to the present value of FCFF for all years till infinity.

Present value of firm = FCFF1/(r-g) where FCFF1 is the free cash to firm next year, r is the weighted average cost of capital, g is the growth rate in FCFF each year.

Thus, the present value of firm = 250,000/(0.09-0.04) = 5,000,000 Euros

The value of equity is the value of firm minis the market value of debt.

Thus, value of equity = 5,000,000 - 2,000,000 = 3,000,000 Euros.

Value of each share = Value of equity/ total number of shares = 3,000,000/600,000 = 5 Euros.

Thua, present value of each stock should be 5 Euros.

jeff jeffy answered 2 years ago
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