Question

You are covering one particular energy sector stock: Peruna Corp. Based on your analysis, you think Peruna Corp. will have FCF as shown in the table below for the next five years. Thereafter, Peruna's FCF will increase at a stable 6% per year in perpetuity. Assume Peruna's debt is valued at $500 million with 14 million shares outstanding. Peruna's WACC is 15%, what is the price of a share of Peruna's stock today? Do NOT round to less than three decimal places in the intermediate steps. Round your final answer to two decimal places. Year 1 2 3 4 5 FCF ($ millions) 75 84 96 111 120

Answer 1

Terminal Value

Free cash flow in year 5 (FCF3) = $120 Million

Growth Rate (g) = 6.00% per year

Weighted Average Cost of capital (WACC) = 15.00%

Therefore, the Horizon Value = FCF5(1 + g) / (WACC – g)

= $120 Million(1 + 0.06) / (0.15 – 0.06)

= $127.20 Million / 0.09

= $1,413.33 Million

Firm’s Value Today

Firms Value Today is the Present Value of the Free Cash flows and the Terminal Value

Year	Cash flow ($ in Million)	Present Value Factor (PVF) at 15.00%	Present Value of cash flows ($ in Million) [Cash flows x PVF]
1	75.00	0.86957	65.22
2	84.00	0.75614	63.52
3	96.00	0.65752	63.12
4	111.00	0.57175	63.46
5	120.00	0.49718	59.66
5	1,413.33	0.49718	702.68
TOTAL			1,017.66

The firm's value today is $1,017.66 Million

The price of a share of Peruna's stock today

Current Price per share = [Firms Value – Debt Outstanding] / Number of stocks outstanding

= [$1,017.66 Million - $500 Million] / 14 Million Shares outstanding

= $517.66 Million / 14 Million Shares outstanding

= $36.98 per share

Therefore, the price of a share of Peruna's stock today is $36.98

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.