Question

In: Finance

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

1

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

2

Donot buy as stock is overpriced at CMP of 100

jeff jeffy answered 2 years ago
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