Question

A company is projected to have a free cash flow of $429 million next year, growing at a 4.7% rate until the end of year 3. After that, cash flows are expected to grow at a stable rate of 2.6%. The company's cost of capital is 10.8%. The company owes $114 million to lenders and has $10 million in cash. If it has 264 million shares outstanding, what is your estimate for its stock price? Round to one decimal place.

Answer 1

Year	Free Cashflow	PV factor @10.8%, 1/(1+r)^time	Free Cashflow * PV factor
1	$        429.00	0.9025	$       387.18
2	$        449.16	0.8146	$       365.87	429*104.7%
3	$        470.27	0.7352	$       345.73	449.16*104.7%
3	$     5,884.16	0.7352	$    4,325.78
		Current firm value	$    5,424.56
Current Free Cashflow	$        470.27
Rate of return	10.80%
Growth Rate	2.60%
Firm value at the horizon i.e. T3	=Current Free Cashflow*(1+Growth rate)/(Rate of return-Growth Rate)
Firm value at the horizon i.e. T3	=470.273661*(1+0.026)/(0.108-0.026)
Firm value at the horizon i.e. T3	$     5,884.16
Company's operating asset value	$     5,424.56	million
Cash	$          10.00	million
Debt value	$      (114.00)	million
Equity value	$     5,320.56	million
No of shares	264.00	million
Share price per share	=5320.56/264
Share price per share	$          20.15