A firm will make $5 in free cash flow next year and $8 in free cash...

A firm will make $5 in free cash flow next year and $8 in free cash flow two years from now. Then the firm’s free cash flow is expected to grow by 2% forever. The discount rate for the firm’s equity is 10%. What is a fair stock price for the firm?

please can you do manually

Expert Solution

Fair stock of the firm is $ 95.45

As per discounted free cash flow method, stock price is the present value of future cash flow.

Step-1:Present value of cash flow of next 2 years

Year	Cash Flow	Discount factor	Present Value
a	b	c=1.10^-a	d=b*c
1	$ 5	0.909091	$ 4.55
2	$ 8	0.826446	$ 6.61

Total			$ 11.16

Step-2:Present value of cash flow after year 2

Present value		=	D2(1+g)/(Ke-g)DF2			Where,
		=	$ 84.30			D2	=	$ 8
						g	=	2%
						Ke	=	10%
						DF2	=	0.826446

Step-3:Calculation of firm's stock price

Firm's stock price		=	$ 11.16	+	$ 84.30
		=	$ 95.45

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