Year 1 2 3 4 5 Free Cash Flow $22 million $24 million $30 million $31...

Year 1 2 3 4 5 Free Cash Flow $22 million $24 million $30 million $31 million $35 million XYZ Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 3% per year. If the weighted average cost of capital is 8% and XYZ has cash of $18 million, debt of $35 million, and 74 million shares outstanding, what is General Industries' expected current share price? Round to the nearest one-hundredth.

Solutions

Expert Solution

Terminal Value (TV)

Terminal Value (TV) = FCF5(1 + g) / (WACC – g)

= $35.00 Million(1 + 0.03) / (0.08 – 0.05)

= $36.05 Million / 0.05

= $721.00 Million.

Firm’s Enterprise Value

Year	Cash flow ($ in Million)	Present Value Factor (PVF) at 8.00%	Present Value of cash flows ($ in Million) [Cash flows x PVF]

1	22.00	0.925926	20.37
2	24.00	0.857339	20.58
3	30.00	0.793832	23.81
4	31.00	0.735030	22.79
5	35.00	0.680583	23.82
5	721.00	0.680583	490.70

TOTAL			602.07

The Value of Equity

The Value of Equity = Firm’s Enterprise Value + Cash - Market Value of Debt

= $602.07 Million + $18.00 Million - $35.00 Million

= $585.07 Million

General Industries' expected current share price

Therefore, the share price today = Value of Equity / Number of shares of common stock outstanding

= $585.07 Million / 74 Million common shares outstanding

= $7.91 per share

“Hence, the General Industries' expected current share price will be $7.91”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.

jeff jeffy answered 1 year ago

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