Question

You’ve been hired by a firm as an analyst. They would like you to utilize the corporate valuation model in determining the stock price of Purina. You estimate the following cash flows for Purina. After the third year, you expect the growth rate to be 5%. Purina has $200 million currently in debt and 5 million shares of stock outstanding. Assuming an 8% required return, what is the intrinsic value of Purina’s stock?

CF1 = $15 million CF2 = $25 million CF3 = $32 million

Answer 1

	i	ii	iii=i+ii	iv	v	vi=iv*v
	year	Cash flow	Terminal value	total cash flow	PVIF @ 8%	present value
	1	15.00		15.00	0.9259	13.89
	2	25.00		25.00	0.8573	21.43
	3	32.00	1120	1,152.00	0.7938	914.49
						949.82
	Terminal value = Cash flow year 4/(required rate - growth rate)
			32*105%/(8%-5%)
			1120
i	Value of firm today =			949.82	million
ii	Value of debt =				200	million
iii=i-ii	value of equity =				749.82	million
iv	Number of share =				5	million
v=iii/iv	Price per share =				$      149.96
	Ans =					$      149.96