Question
In: Finance
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.
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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
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