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 |
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