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In: Finance
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.
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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 |
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