Question

Assume that today is December 31, 2019, and that the following information applies to Abner Airlines: After-tax operating income [EBIT(1 - T)] for 2020 is expected to be $400 million. The depreciation expense for 2020 is expected to be $190 million. The capital expenditures for 2020 are expected to be $350 million. No change is expected in net operating working capital. The free cash flow is expected to grow at a constant rate of 7% per year. The required return on equity is 15%. The WACC is 9%. The firm has $199 million of non-operating assets. The market value of the company's debt is $2.440 billion. 90 million shares of stock are outstanding. Using the corporate valuation model approach, what should be the company's stock price today? Do not round intermediate calculations. Round your answer to the nearest cent

Answer 1

Calculation of expected Free cash flows for 2020
Adjustment	Particulars	Amount in $
	After tax operating income (NOPAT)	400,000,000.00
Add:	depreciation	190,000,000.00
Less:	Changes in working capital	-
Less:	Capital expenditure	350,000,000.00
	Free cashflow expected in 2020	240,000,000.00
As per Gordon model, value of firm= Expected free cashflow/(cost of capital-growth)
So value of firm=	240,000,000/(0.09-0.07)
=	$                               12,000,000,000.00
Value of equity =	Value of firm + non operating assets - marker value of debt
	12000000000+199000000-2440000000
	$                                  9,759,000,000.00
Shares outstanding=	90,000,000.00
Value per stock	$                                                    108.4	(9759000000/90000000)