-Company A's free cash flow is estimated to be $75 million for the next three years....

-Company A's free cash flow is estimated to be $75 million for the next three years.

-expect growth of 5 percent per year in free cash flow

-Company A has 18 million shares outstanding, cash on hand of $50 million, liabilities of $155 million, and a weighted average cost of capital of 8 percent.

If you want to become an owner (a shareholder), how much can you expect to pay per share? (Do not round intermediate calculations. Round your final answer to two decimal places.)

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Expert Solution

Terminal Value

Terminal Value (TV) = FCF3(1 + g) / (Ke – g)

= $75.00 Million(1 + 0.05) / (0.08 – 0.05)

= $78.75 Million / 0.03

= $2,625.00 Million

Firm’s Enterprise value

Firm’s Enterprise value is the Present Value of the Free Cash Flows plus the Present Value of Terminal Value

Year	Cash flow ($ in Million)	Present Value Factor (PVF) at 8.00%	Present Value of cash flows ($ in Million) [Cash flows x PVF]

1	75.00	0.925926	69.44
2	75.00	0.857339	64.30
3	75.00	0.793832	59.54
3	2,625.00	0.793832	2,083.81

TOTAL			2,277.09

The Firm’s Enterprise value is $2,277.09 Million

The Value of Equity

The Value of Equity = Firm’s Enterprise Value + Cash on hand – Liabilities

= $2,277.09 Million + $50 Million - $155 Million

= $2,172.09 Million

Price of the Stock

Share price today = Value of Equity / Number of shares of common stock outstanding

= $2,172.09 Million / 18 Million shares outstanding

= $120.67 per share

Therefore, the Expected price per share will be $120.67

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.

ekkarill92 answered 2 years ago

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