Question

A company is forecasted to generate free cash flows of $21 million next year and $24 million the year after. After that, cash flows are projected to grow at a stable rate in perpetuity. The company's cost of capital is 8.1%. The company has $48 million in debt, $17 million of cash, and 28 million shares outstanding. Using an exit multiple for the company's free cash flows (EV/FCFF) of 14, what's your estimate of the company's stock price?

a. 30.8

b. 26.8

c. 14.9

d. 10.6

e. 18.0

Answer 1

(below all amount are in millions)

FCF next year (FCF1) =21

FCF 2nd year (FCF2) =24

FCF will then growt in perpetuity So year 2 is terminal year at which terminal value will be calculated using exit multiple

Terminal value formula = FCF year 2 * exit multiple for the FCF

So terminal value at end of year 2 = 24*14 =336

wacc (k) =8.1%

Value of firm is present value of free cash flows for year 1 to 2 and terminal value at end of year 2

Value of firm = (FCF1/(1+k)^1) + ((FCF2+TV)/(1+k)^2)

=(21/(1+8.1%)^1) + ((24+336)/(1+8.1%)^2)

327.4976659m

Value of debt = 48m

value of cash =17m

Value of equity = value of firm - value of debt+ cash

=327.4976659-48+17

=296.4976659

Price per share = Value of equity/number of shares

=296.4976659/28

=10.58920235

or 10.6

So price per share is $10.6.

Answer is d 10.6