Question

A company is projected to generate free cash flows of $171 million next year and $196 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 12.3%. It has $129 million worth of debt and $69 million of cash. There are 23 million shares outstanding. If the exit multiple for this company’s free cash flows (EV/FCFF) is 6.9, what’s your estimate of the company’s stock price? Round to one decimal place.

Answer 1

stock price = equity value / shares outstanding

equity value = firm value - debt + cash

firm value = present value of next 2 years FCF + present value of terminal value

terminal value = year 2 FCF * exit multiple

present value = future value / (1 + cost of capital)number of years

firm value = $1,380,059,455

equity value = firm value - debt + cash

equity value = $1,380,059,455 - $129,000,000 + $69,000,000

equity value = $1,320,059,455

stock price = equity value / shares outstanding

stock price = $1,320,059,455 / 23,000,000

stock price = $57.39