A company is projected to have a free cash flow of $429 million next year, growing...

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.

Expert Solution

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

jeff jeffy answered 1 year ago

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