Question

A company is projected to have a free cash flow of $368 million next year, growing at a 5% rate until the end of year 3. After that, cash flows are expected to grow at a stable rate of 2.4% in perpetuity. The company's cost of capital is 8.9%. The company owes $99 million to lenders and has $11 million in cash. If it has 218 million shares outstanding, what is your estimate for its stock price? Round to one decimal place. (e.g., $4.32 = 4.3)

Answer 1

	WACC=	8.90%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	368		368	1.089	337.9247
2	368	5.00%	386.4		386.4	1.185921	325.82272
3	386.4	5.00%	405.72	6391.65	6797.37	1.291467969	5263.28965
	Long term growth rate (given)=	2.40%			Value of Enterprise =	Sum of discounted value =	5927.04
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

- Cash & Cash Equivalents

5927.04 = Equity value+99-11

Equity value = 5839.04

share price = equity value/number of shares

share price = 5839.04/218

share price = 26.78