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In: Finance

The firm's weighted average cost of capital is 13% and it has $2550000 of debt at...

The firm's weighted average cost of capital is 13% and it has $2550000 of debt at market value and $510000 of preferred stock in terms of market value. The estimated free cash flow over next 5 years are in the table. Beyond 2024 to infinity, the firm expects its free cash flow to grow by 6% annually.

2020 - $250000, 2021 - $310000, 2022 - $380000, 2023 - $430000, 2024 - $470000

a. Estimate the value of the entire company by using free cash flow valuation model.

b. Use your finding in part a, along with the data provided above, to find common stock value.

c. If the firm plans to issue 200000 shares of common stock, what is its estimated value per share.

Solutions

Expert Solution

Steps:

The terminal value or value of entire company is found based on the free cash flow at end of year 5. The terminal value formula at year 5 is (FCFF * growth rate)/(Cost of capital - growth rate).

To find the price per share we need to use the following steps:

1. Find the present values of all estimated free cash flows and the terminal value.

2. Deduct the market value of debt and preferred stock. This gives the market value of equity.

3. Divide the number of shares or outstanding stock to find price per share.

Screenshots of excel caluclations:

jeff jeffy answered 1 year ago
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