Question

What is the price per share based on the equity free cash flow model?

Year 1:

Revenue: 630

Fixed costs: 120

Variable costs: 200

Additional investments in NWC: 10

Additional investments in operating long-term assets: 70

Depreciation: 60

Interest expenses: 35

Newly issued debt: 25

Principal repayment: 15

Cost of equity, Rs: 0.14

Corporate tax rate: 0.40

Growth rate per year:

from year 1 through year 5: 0.12

After year 5: 0.05

Market value:

Short-term debt: 100

Long-term debt: 600

Preferred Stock:

Market price per share: 10

Number of shares: 10

Common Stock:

Market price per share: 18

Number of shares: 100

a. $16.39*

b. $13.09

c. $15.33

d. $14.21

Answer 1

YEAR 1:
NI = (630-120-200-60-35)*(1-40%) =	$                 129
FCFE = NI+Depreciation-Additional investments in Operating long term assets and NWC = 129+60-10-70 =	$                 109
	0	1	2	3	4	5
FCFE		₹        109.00	₹        122.08	₹           136.73	₹           153.14	₹       171.52
PVIF at 14%	1	0.87719	0.76947	0.67497	0.59208	0.51937
PV at 14%		₹          95.61	₹          93.94	₹              92.29	₹             90.67	₹         89.08
Sum of PVs t1 to t5	₹          692.47
Continuing value of FCFE = 171.51*1.05/(0.14-0.05) =						₹   2,000.95
PV of continuing value = 2000.95*0.51937 =	₹       1,039.23
Total value of equity	₹       1,731.70
Less: Value of preferred stock	₹          100.00
Value of common equity	₹       1,631.70
Number of shares	₹          100.00
Price per share	₹             16.32
Answer: Option [a] $16.39
Difference with solution due to approximation.