Question

Assume that today is December 31, 2016, and that the following information applies to Abner Airlines:

After-tax operating income [EBIT(1 - T)] for 2017 is expected to be $650 million.
The depreciation expense for 2017 is expected to be $200 million.
The capital expenditures for 2017 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 4% per year.
The required return on equity is 16%.
The WACC is 10%.
The market value of the company's debt is $3 billion.
100 million shares of stock are outstanding.

Using the corporate valuation model approach, what should be the company's stock price today? Round your answer to the nearest cent. Write out your answer completely. For example, 0.00013 million should be entered as 130.

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 + $200 Million - $275 Million – $0 Million

= $575 Million

Step-2, Total Firm Value

Weighted Average Cost of Capital (WACC) = 10%

Growth Rate (g) = 4% per year

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

= $575 Million / (0.10 – 0.04)

= $575 Million / 0.06

= $9,583.33 Million

Step-3, Value of Common Equity

Value of Common Equity = Total Firm Value – Market Value of Debt

= $9,583.33 Million - $3,000 Million

= $6,583.33 Million

Step-4, Stock price today

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

= $6,583.33 Million / 100 Million common shares outstanding

= $65.83 per share

“The company's stock price today = $65.83 per share”