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
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