A company is projected to have a free cash flow of $357 million next year, growing...

A company is projected to have a free cash flow of $357 million next year, growing at a 4.4% rate until the end of year 3. After that, cash flows are expected to grow at a stable rate of 2.4%. The company's cost of capital is 9.3%. The company owes $129 million to lenders and has $8 million in cash. If it has 279 million shares outstanding, what is your estimate for its stock price? Round to one decimal place.

Expert Solution

	0	1	2	3	4
FCF		$ 357.00	$ 372.71	$ 389.11	$ 398.45
PVIF at 9.3%	1	0.91491	0.83707	0.76584
PV at 9.3%		$ 326.62	$ 311.98	$ 297.99
Cumulative PV t1 to t3	$ 936.60	million
Continuing value of FCF = 398.45/(0.093-0.024) =				$ 5,774.64
PV of continuing value of FCF = 5,774.64*0.76584 =	$ 4,422.45	million
Value of operations	$ 5,359.05	million
Add: Cash	$ 8.00	million
Value of the firm	$ 5,367.05	million
Less: Debt	$ 129.00	million
Value of equity	$ 5,496.05	million
Number of shares	279.00	million
Estimate of stock price = 5646.05/279 =	$ 19.70

jeff jeffy answered 1 year ago

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