Question

ABC’s the most recent free cash flow (FCF0) is $200 million. The free cash flow is expected to grow at a rate of 40 percent, and 20 percent in the second year. After two years, it is expected to grow forever at a constant rate of 5 percent. The cost of common stock (rs) is 12% and the weighted average cost of capital (WACC) is 9%. ABC balance sheet shows $20 million in short term investments that are unrelated to operations. The balance sheet also shows $100 million in debt, $50 million in preferred stocks, and $250 million in common stocks.If the company has 40 million shares of common stocks, what is your best estimate for the stock price per share today? Assume that company's book values of debt and preferred stocks are very close to the market vales.

Answer 1

	WACC=	9.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	200	40.00%	280		280	1.09	256.8807
2	280	20.00%	336	8820	9156	1.1881	7706.42202
	Long term growth rate (given)=	5.00%			Value of Enterprise =	Sum of discounted value =	7963.3
Where
Current FCF =Previous year FCF*(1+growth rate)^corresponding year
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 2 *(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+ MV of preferred stock

- Short term investments

7963.3 = Equity value+100+50-20

Equity value = 7833.3

share price = equity value/number of shares

share price = 7833.3/40

share price = 195.83