Question

In: Finance

You expect ABC Corporation to generate the following free cash flows over the next five years:...

You expect ABC Corporation to generate the following free cash flows over the next five years:

Year

1

2

3

4

5

FCF ($ millions)

75

84

96

111

120

Beginning with year six, you estimate that ABC's free cash flows will grow at 6% per year and that ABC's weighted average cost of capital is 15%.

If ABC has $500 million of debt, $50 million of cash, and 14 million shares of stock outstanding, then what is the price per share for ABC Corporation?

Solutions

Expert Solution

WACC= 15.00%
Year Previous year FCF FCF growth rate FCF current year Horizon value Total Value Discount factor Discounted value
1 0 0.00% 75 75 1.15 65.2174
2 75 0.00% 84 84 1.3225 63.51607
3 84 0.00% 96 96 1.520875 63.12156
4 96 0.00% 111 111 1.74900625 63.46461
5 111 0.00% 120 1413.333 1533.333 2.011357188 762.3375
Long term growth rate (given)= 6.00% Value of Enterprise = Sum of discounted value = 1017.66
Where
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 5 *(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
- Cash & Cash Equivalents
1017.66 = Equity value+500-50
Equity value = 567.66
share price = equity value/number of shares
share price = 567.66/14
share price = 40.55

jeff jeffy answered 1 year ago
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