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?

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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 7 months ago

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