Question

A company is projected to have a free cash flow of $357 million next year, growing at a 6% 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 9.1%. The company owes $96 million to lenders and has $14 million in cash. If it has 207 million shares outstanding, what is your estimate for its stock price? Round to one decimal place. (e.g., $4.32 = 4.3)

Answer 1

Step-1:Calculation of present value of cash flows of next 3 years
Year	Cash flow	Discount factor	Present Value
a	b	c=1.091^-a	d=b*c
1	$ 357.00	0.9165903	$ 327.22
2	$ 378.42	0.8401377	$ 317.92
3	$ 401.13	0.7700621	$ 308.89
Total			$ 954.04
Step-2:Calculation of present value of after year 3 cash flows
Present value	=	CF3*(1+g)/(Ke-g)*DF3			Where,
	=	$ 4,720.97			CF3	=	$ 401.13
					g	=	2.40%
					Ke	=	9.10%
					DF3	=	0.770062
Step-3:Present value of all cash flows
Present value of cash flows	=	$     954.04	+	$ 4,720.97	+	$    14.00
	=	$ 5,689.00
Step-4:Calculation of value per share
Value of firm		$ 5,689.00
Less value of debt		$       96.00
Value of equity		$ 5,593.00
/ No. of shares		207
Value per share		$       27.02
Note:
All amounts are in million except value per share.