Question

The tables below present expected free cash flow related data for XYZ for Year 1 and selected balance sheet data as of Year 0.  XYZ has reached the steady state growth phase and XYZ’s WACC is 8%.

Year 0 Data                                                               

Debt	4,000
Shares outstanding	400

Year 1 Data

NOPLAT	4,500
Free Cash Flow	1,200
CAPEX	130

You expect that XYZ would grow at 2.0% per year in perpetuity. What is XYZ’s intrinsic value per share.

	A.	67.5
	B.	40
	C.	75
	D.	50

Answer 1

As per Gordon model, value of firm= Expected free cashflow/(cost of capital-growth)
So value of firm=	1200/(0.08-0.02)
=	$                                               20,000.00
Value of equity =	Value of firm - marker value of debt
	20000-4000
	$                                               16,000.00
Shares outstanding=	400.00
Value per share	$                                                      40.00	(16000/400)

So the correct answer is option B i.e. $40.