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 $650 million. The depreciation expense for 2020 is expected to be $110 million. The capital expenditures for 2020 are expected to be $275 million. No change is expected in net operating working capital. The free cash flow is expected to grow at a constant rate of 6% per year. The required return on equity is 16%. The WACC is 9%. The firm has $201 million of non-operating assets. The market value of the company's debt is $5.596 billion. 110 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

= $650 Million + $110 Million - $275 Million – $0 Million

= $485 Million

Step-2, Total Firm Value

Weighted Average Cost of Capital (WACC) = 9.00%

Growth Rate (g) = 6.00% per year

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

= $485 Million / (0.09 – 0.06)

= $485 Million / 0.03

= $16,166.67 Million

Step-3, Value of Common Equity

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

= $16,166.67 Million + $201 Million - $5,596 Million

= $10,771.67 Million

Step-4, Stock price today

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

= $10,771.67 Million / 110 Million common shares outstanding

= $97.92 per share

“Hence, the company's stock price today will be $97.92”