Question

Given the following information:

Year 1 Free cash flow: 40 million

Year 2 Free cash flow 90 m

Year 3 Free cash flow 100 m

After year 3, expected FCF growth is expected to be 4%

The cost of capital is 9%

Short term investments = 50 million

Debt is currently 25 million

Preferred stock = 5 million

There are 20 million outstanding stock shares.

1. Calculate the intrinsic stock price.

2. If the current stock price was $100.00, would you buy the stock? Why/WHY NOT:

Answer 1

1]	[$ in millions except stock price]	0	1	2	3
	FCF		$          40.00	$           90.00	$        100.00
	PVIF at 9.00% [PVIF = 1/1.09^t]		0.91743	0.84168	0.77218
	PV at 9.00%		$          36.70	$           75.75	$          77.22
	Sum of PVs of FCF--t1 to t3	$         189.67
	Terminal value of equity = 100*1.04/(0.09-0.04) =				$          2,080
	PV of Terminal value of equity = 2080/1.09^3 =	$     1,606.14
	Value of operations	$     1,795.81
	Add: Short term investments	$           50.00
	Less: Debt	$           25.00
	Less: Preferred stock	$             5.00
	Value of equity	$     1,815.81
	Number of shares	20.00
	Intrinsic stock price	$           89.79
2]	No I will not buy the stock for $100 as the intrinsic
	value as calculated above is lower at $89.79. The
	stock is overpriced in the market.