Question

A company generated free cash flow of $57 million during the past year. Free cash flow is expected to increase 5% over the next year and then at a stable 2.9% rate in perpetuity thereafter. The company's cost of capital is 8.1%. The company has $434 million in debt, $39 million of cash, and 39 million shares outstanding. What's the value of each share?

		a. 4.8
		b. 8.3
		c. 5.6
		d. 17.8
		e. 19.4

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) ]

= ($ 57 million x 1.05) / 1.081 + 1 / 1.081 x [ ($ 57 million x 1.05 x 1.029) / (0.081 - 0.029) ]

= $ 59.85 million / 1.081 + $ 1,184.339423 million / 1.081

= $ 1,244.189423 million / 1.081

= $ 1,150.961538 million

So, the per share value will be:

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

= ($ 1,150.961538 million - $ 434 million + $ 39 million) / 39 million shares

= $ 755.9615385 million / 39 million shares

= $ 19.4 Approximately