Question

Luthor Corp. is expected to generate free cash flow (FCF) of $7,790.00 million this year (FCF₁ = $7,790.00 million), and the FCF is expected to grow at a rate of 21.40% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 2.82% per year, which will last forever (FCF₄). Assume the firm has no non-operating assets. If Luthor Corp.’s weighted average cost of capital (WACC) is 8.46%, what is the current total firm value of Luthor Corp.? (Note: Round all intermediate calculations to two decimal places.)

$225,918.74 million

$233,522.01 million

$188,265.62 million

$24,220.06 million

Luthor Corp.’s debt has a market value of $141,199 million, and Luthor Corp. has no preferred stock. If Luthor Corp. has 450 million shares of common stock outstanding, what is Luthor Corp.’s estimated intrinsic value per share of common stock? (Note: Round all intermediate calculations to two decimal places.)

$103.59

$104.59

$313.78

$115.05

Answer 1

	WACC=	8.46%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	7790		7790	1.0846	7182.3714
2	7790	21.40%	9457.06		9457.06	1.17635716	8039.2761
3	9457.06	21.40%	11480.87084	209301.975	220782.8458	1.275876976	173043.9925
	Long term growth rate (given)=	2.82%			Value of Enterprise =	Sum of discounted value =	188265.64
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

188265.64 = Equity value+141199

Equity value = 47066.64

share price = equity value/number of shares

share price = 47066.64/450

share price = 104.59