Question

-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.)

Answer 1

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.