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 10 months ago

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