In: Accounting
-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.)
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.