Question

A company is projected to generate free cash flows of $178 million next year and $191 million at the end of year 2, after which it is projected grow at a steady rate in perpetuity. The company's cost of capital is 13.6%. It has $107 million worth of debt and $77 million of cash. There are 21 million shares outstanding. If the exit multiple for this company's free cash flows (EV/FCFF) is 7.7, what's your estimate of the company's stock price? Round to one decimal place.

Answer 1

The exit multiple is 7.7. The cost of capital is 13.60%

The FCF in year 2 is $191 Million

Thus the terminal value of FCF is = 7.70 X 191 = $1470.70

The table below shows the discounted values of FCF

Cost of Capital	13.60%
	Yr 1	Yr 2
FCF	178.00	191.00
Terminal Value		1,470.70
PV of FCF	156.69	148.01
PV of Terminal Value		1,139.64

The present value of Yr1 Free Cash Flow = 178/ (1+13.60%)^1 = $156.69 Million

The present value of Yr2 Free Cash Flow = 191/ (1+13.60%)^2 = $148.01 Million

The present value of Terminal value Free Cash Flow = 1470.70 / (1+13.60%)^2 = $1,139.64 Million

The present value of all cash flows = (156.69 + 148.01 + 1139.64) = $1444.33 Million

The value of Equity = Present value of all cash flows - Debt + Cash

= 1444.33 - 107 + 77 = $1,414.33 Million

Total number of shares = 21 Million

Thus the stock price = Value of Equity / Number of shares = 1414.33/ 21 = $67.35