Question

1. The FCF of company ABC is growing at a constant rate 8%. FCF0 = $25 million. The weighted average cost of capital (WACC) for this company is 18%. This company has a short-term investment of $7 million, debt $12 million and preferred stock of $1 million. The number of shares outstanding is 10 million. How much is the stock price according to the FCFF valuation model?

2. Company XYZ has the following FCF:

Year 1 D₁ = $ 0.5

Year 2 D₂ = $ 1

Year 3 D₃ = $ 1.5

Year 4 D₄ = $ 1.5

Year 5 D₅ = $ 2.0

Dividend grows at 6% after year 5

Suppose the required return is 8%. How much is the common stock price for this company?

Answer 1

	FCF0	FCF in Year 0	$25	million
	g	Constant growth rate=8%	0.08
	FCF1=FCF0*(1+g)	FCF in Year 1=25*(1+0.08)	$27.00	million
	R	Required Return =WACC=18%	0.18
	EV=F1/(R-g)	Enterprise Value=27/(0.18-0.08)	$270.00	million
		Enterprise Value+Cash + Short term investment=Debt+Preference Capital+Common Equity
		270+7=12+1+Common Equity
		Common Equity=277-13=	$264	million
		Number of shares	10	million
		Stock Price =264/10=	$26.40
		Present Value of Cash Flow=Cah Flow/((1+R)^N)
		R=Required Return=8%=0.08
		D6=Dividend in year6=D5*1.06
		D6=Dividend in year6=2.0*1.06	$2.12
		Price in Year 5=D6/(0.08-0.06)	$106.00
			N	CF	PV=CF/(1.08^N)
			Year	Cash Flow	Present Value
		D1	1	$0.50	$0.46
		D2	2	$1.00	$0.86
		D3	3	$1.50	$1.19
		D4	4	$1.50	$1.10
		D5	5	$2.00	$1.36
		D5	5	$106.00	$72.14
				SUM	$77.12
		Current Price of Common Stock=P0=	$77.12