TRX Corporation is expected to generate free cash flows (FCF) of $6.45 million in year 1,...

TRX Corporation is expected to generate free cash flows (FCF) of $6.45 million in year 1, $8.78 million in year 2, $11.15 million in year 3, and $15.54 million in year 4. After then, the FCF will grow by 3% per year. TRX has 10 million shares outstanding, $4 million in excess cash, and it has $2 million in debt. If its cost of capital is 7%, the stock price would be $________? Input your answer without the $ sign and round your answer to two decimal places.

Expert Solution

Answer : Calculation of Stock Price :

For the purpose of Calculation of Stock Price , we first need to estimate Value of Equity :

Value of Equity = Value of Firm + Excess Cash - Debt Outstanding

Below is the table showing calculation of Value of Firm :

Year	Free Cash Flows (in million)	PVF @7% [1 / (1 + 0.07)^n]	Present Value of Cash Flows
1	6.45	0.934579439	6.028037383
2	8.78	0.873438728	7.668792034
3	11.15	0.816297877	9.101721327
4	15.54	0.762895212	11.8553916
4	400.155 (Terminal Value)	0.762895212	305.2763336
		Value of Firm	339.9302759

Terminal Value = [Free Cash Flow in year 4 * (1 + growth rate)] / (Cost of Capital - growth rate)

= [15.54 * (1 + 0.03)] / [0.07 - 0.03]

= 400.155 million

Value of Equity = Value of Firm + Excess Cash - Debt Outstanding

= 339.9302759 + 4 - 2

= $341.9302759 million

Stock Price = Value of equity / Number of shares outstanding

= $341.9302759 miillion / 10 million

= 34.19

jeff jeffy answered 1 year ago

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