Question

Google has cash flows of $29.10, $36.93, and $45.03 billion for the next three years. After that Google’s cash flows is $47.51 billion and its cash flow will grow at 5.5% forever. The cost of capital is 10.20%. Google has 700 million shares outstanding. What is the price of Google stock today?

Answer 1

Terminal value is future value of equity for the perpetuity.Terminal value will be calculated at the end of year 3 using year 4 cash flow, cost of capital and growth rate of 5.5% forever. as terminal value is calculated at the end of year 3, so it will discounted only for 3 years.

Terminal value = cash flow in year 4/(cost of capital - growth rate)

Present value (PV) of cash flow = cash flow/(1+cost of capital)^year

Price of Google stock today is $1,208.29.

Years	0	1	2	3	4
Cash flows	$0.00	$29,100,000,000.00	$36,930,000,000.00	$45,030,000,000.00	$47,510,000,000.00
Terminal value	$0.00	$0.00	$0.00	$1,010,851,063,829.79	$0.00
PV of cash flows	$0.00	$26,406,533,575.32	$30,409,978,886.76	$788,987,672,709.79	$0.00
Total PV of cash flows	$845,804,185,171.87
No. of shares outstanding	700,000,000
Price per share	$1,208.29

Formulas and calculation