Question

Assume that today is December 31, 2019, and that the following information applies to Abner Airlines:

After-tax operating income [EBIT(1 - T)] for 2020 is expected to be $550 million.
The depreciation expense for 2020 is expected to be $150 million.
The capital expenditures for 2020 are expected to be $450 million.
No change is expected in net operating working capital.
The free cash flow is expected to grow at a constant rate of 7% per year.
The required return on equity is 13%.
The WACC is 10%.
The firm has $208 million of non-operating assets.
The market value of the company's debt is $3.110 billion.
190 million shares of stock are outstanding.

Using the corporate valuation model approach, what should be the company's stock price today? Do not round intermediate calculations.

Answer 1

Step-1, Free Cash Flow (FCF)

Free Cash Flow (FCF) = Net Operating Profit After Tax(NOPAT) + Depreciation Expenses - Capital Expenditures – Changes in Net Working Capital

=EBIT(1 – Tax Rate) + Depreciation - Capital Expenditures – Changes in Net Working Capital

= $500 Million + $150 Million - $450 Million – $0 Million

= $200 Million

Step-2, Total Firm Value

Weighted Average Cost of Capital (WACC) = 10.00%

Growth Rate (g) = 7.00%

Therefore, the Total Firm Value = FCF / (WACC – g)

= $200 Million / (0.10 – 0.07)

= $200 Million / 0.03

= $6,666.67 Million

Step-3, Value of Common Equity

Value of Common Equity = Total Firm Value + Value of non-operating assets – Market Value of Debt

= $6,666.67 Million + $208 Million - $3,110 Million

= $3,764.67 Million

Step-4, Stock price today

The Stock price today = Value of Common Equity / Number of shares of common stock outstanding

= $3,764.67 Million / 190 Million common shares outstanding

= $19.81 per share

Hence, the company's stock price today will be $19.81