Given the following information: Year 1 free cash flow: 40 million Year 2 free cash flow...

Given the following information: Year 1 free cash flow: 40 million Year 2 free cash flow 90 million Year 3 free cash flow 100 million After year 3, expected FCF growth is expected to be 4% The cost of capital is 9% Short term investments is 50 million Debt is currently 25 million Preferred shock is 5 million There are 20 million outstanding stock shares.

1. Calculate the intrinsic stock price

. If the current stock price was $100.00, would you buy the stock? Why/ why not.

Solutions

Expert Solution

	WACC=	9.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	40		40	1.09	36.6972
2	40	0.00%	90		90	1.1881	75.7512
3	90	0.00%	100	2080	2180	1.295029	1683.35999
	Long term growth rate (given)=	4.00%			Value of Enterprise =	Sum of discounted value =	1795.81

Where
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 3 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor

Enterprise value = Equity value+ MV of debt+ MV of preferred stock

1795.81 = Equity value+25+5

Equity value = 1765.81

share price = equity value/number of shares

share price = 1765.81/20

share price = 88.29 = intrinsic value

Donot buy as stock is overpriced at CMP of 100

jeff jeffy answered 9 months ago

Next > < Previous

Related Solutions

A company generated free cash flow of $43 million during thepast year. Free cash flow...

A company generated free cash flow of $43 million during the past year. Free cash flow is expected to increase 6% over the next year and then at a stable 2.8% rate in perpetuity thereafter. The company's cost of capital is 11.2%. The company has $330 million in debt, $20 million of cash, and 28 million shares outstanding. What's the value of each share?

Year 1 2 3 4 5 Free Cash Flow $22 million $24 million $30 million $31...

Year 1 2 3 4 5 Free Cash Flow $22 million $24 million $30 million $31 million $35 million XYZ Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 3% per year. If the weighted average cost of capital is 8% and XYZ has cash of $18 million, debt of $35 million, and 74 million shares outstanding, what is General Industries'...

Given the following data: FCF1 = $20 million; FCF2 = $30 million; free cash flow grows...

Given the following data: FCF1 = $20 million; FCF2 = $30 million; free cash flow grows at a rate of 2% for year 3 and beyond. If the weighted average cost of capital is 12%, calculate the value of the firm. $270.72 million $266.73 million $285.71 million $253.33 million

A company’s free cash flow next year is expected to be -$11.2 million, $3.6 million the...

A company’s free cash flow next year is expected to be -$11.2 million, $3.6 million the following year, and $6.2 million in the third year. Thereafter, the free cash flow is expected to grow forever at a rate of 4.8% per year. The company’s weighted average cost of capital is 11.1% per year and the market value of its debt is $35.2 million. If the company has four million shares of common stock outstanding, what is the value per share?...

Covan, Inc. is expected to have the following free cash? flow: Year 1 2 3 4...

Covan, Inc. is expected to have the following free cash? flow: Year 1 2 3 4 FCF 11 13 14 15 Grow by 4 % per year a. Covan has 8 million shares outstanding, $2 million in excess cash, and it has no debt. If its cost of capital is 12 %, what should be its stock price? b. Covan reinvests all its FCF and has no plans to add debt or change its cash holdings (it does not invest...

Covan, Inc. is expected to have the following free cash? flow: Year 1 2 3 4...

Covan, Inc. is expected to have the following free cash? flow: Year 1 2 3 4 FCF 13 15 16 17 Grow by 3 % per year a. Covan has 6 million shares? outstanding, ?$3 million in excess? cash, and it has no debt. If its cost of capital is 10 %?, what should be its stock? price? b. Covan reinvests all its FCF and has no plans to add debt or change its cash holdings? (it does not invest...

Covan, Inc. is expected to have the following free cash flow: Year 1 2 3 4...

Covan, Inc. is expected to have the following free cash flow: Year 1 2 3 4 times times times••• FCF 1010 1212 1313 1414 Grow by 3 %3% per year a. Covan has 88 million shares outstanding, $44 million in excess cash, and it has no debt. If its cost of capital is 11 %11%, what should be its stock price? b. Covan adds its FCF to cash, and has no plans to add debt. If you plan to sell...

Using the following free cash flow data: Year Cash Flow 2017 $4,000,000

Using the following free cash flow data: Year Cash Flow 2017 $4,000,000 2018 $4,400,000 Prepare a 10-year cash flow forecast based upon the rate of growth in cash flow between 2017 and 2018. Calculate the net present value of the forecasted cash flows assuming an immediate investment cost of $18,500,000 Please show your work so I can recreate in excel

2. AMC Corporation currently expects to generate $40 million free cash flows each year forever, and...

2. AMC Corporation currently expects to generate $40 million free cash flows each year forever, and it currently has $100 million cash. Its cost of capital is 10%. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come out that will change AMC’s free cash flow each year will be either $60 million or $20 million. a.What is AMC’s share price prior to the...

Using the information in Exhibit 1 below, calculate North Rock’s Free Cash flow for the year...

Using the information in Exhibit 1 below, calculate North Rock’s Free Cash flow for the year 2019 (in $ millions). Exhibit 1 North Rock Selected Financial Information for the 2019 Period (All amounts are in $ millions except where stated) Current EBIT (2019) $350.00 Interest Expense $8.45 Interest Paid $8.45 Dividends Paid $2.11 Tax rate (%) 35 Increase (Decrease) in accounts receivable $15.80 Increase (Decrease) in accounts payable $(10.25) I ncrease (Decrease) in inventory $17.98 Fixed Capital Investment $25.50 Debt...

Subjects