Question

A company generated free cash flow of $43 million during the past year. Free cash flow is expected to increase 6% over the next year and then at a stable 2.8% rate in perpetuity thereafter. The company's cost of capital is 11.2%. The company has $330 million in debt, $20 million of cash, and 28 million shares outstanding. What's the value of each share?

Answer 1

The value is computed as follows:

= Free cash flow next year / (1 + cost of capital) + 1 / (1 + cost of capital) x [ (Free cash flow next year x (1 + growth rate) / (cost of capital - growth rate) ]

= ($ 43 million x 1.06) / 1.112 + 1 / 1.112 x [ ($ 43 million x 1.06 x 1.028) / (0.112 - 0.028) ]

= $ 45.58 million / 1.112 + $ 557.812381 million / 1.112

= $ 603.392381 million / 1.112

= $ 542.6190476 million

So, the per share value will be:

= (Value computed above - debt + cash) / Number of shares outstanding

= ($ 542.6190476 million - $ 330 million + $ 20 million) / 28 million shares

= $ 232.6190476 million / 28 million shares

= $ 8.31 Approximately