Question
In: Finance
An analyst is trying to estimate the intrinsic value of Burress Inc. The analyst has estimated...
An analyst is trying to estimate the intrinsic value of Burress Inc. The analyst has estimated the company's free cash flows for the following years
Year Free Cash flow
1 $3,000
2 $4,000
3 $5,000
An analyst estimates that after 3 years (t=3) the company's cashflows will grow at a constant rate of 6% per year. the analyst estimates that the company's WACC is 10%. the company's debt and preferred stock has a total market value of $25,000 and there are 1,000 outstanding shares of common stock. If the price of the stock is currently $80 per share, will you invest in it?
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Expert Solution
Horizon value at year 3 = CF3(1+g)/(WACC-g)
= 5000(1+.06)/(.10-.06)
= 5000 * 1.06 / .04
= $ 132500
PRESENT VALUE OF FIRM =[PVF10%,1*CF1]+[PVF10%,2*CF2]+[PVF10%,3*CF3]+[PVF10%,3*HORIZON VALUE]
=[.90909*3000]+ [.82645*4000]+[.75131*5000]+[.75131*132500]
= 2727.27+ 3305.8+ 3756.55+ 99548.58
= $ 109338.20
Value of equity = value of firm - value of debt and preferred stock
= 109338.20 - 25000
= 84338.20
Fair value of common stock per share = 84338.20/1000 = $ 84.34 per share
since the fair value of share is higher than actual price of $ 80 per share ,you should invest in this stock .
jeff jeffy answered 8 months agoRelated Solutions
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