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 $450 million.
The depreciation expense for 2020 is expected to be $200 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 4% per year.
The required return on equity is 16%.
The WACC is 9%.
The firm has $190 million of non-operating assets.
The market value of the company's debt is $4.113 billion.
120 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

Step-1, Free Cash Flow (FCF)

Free Cash Flow (FCF) = Net Operating Profit After Tax(NOPAT) + Depreciation Expenses - Capital Expenditures – Changes in Net Working Capital

=EBIT(1 – Tax Rate) + Depreciation - Capital Expenditures – Changes in Net Working Capital

= $450 Million + $200 Million - $350 Million – $0 Million

= $300 Million

Step-2, Total Firm Value

Weighted Average Cost of Capital (WACC) = 9.00%

Growth Rate (g) = 4.00% per year

Therefore, the Total Firm Value = FCF / (WACC – g)

= $300 Million / (0.09 – 0.05)

= $300 Million / 0.04

= $6,000 Million

Step-3, Value of Common Equity

Value of Common Equity = Total Firm Value + Value of non-operating assets – Market Value of Debt

= $6,000 Million + $190 Million - $4,113 Million

= $2,077 Million

Step-4, Stock price today

The Stock price today = Value of Common Equity / Number of shares of common stock outstanding

= $2,077 Million / 120 Million common shares outstanding

= $17.31 per share

“Hence, the company's stock price today will be $17.31”