Question

Portage Bay Enterprises has $ 1 million in excess​ cash, no​ debt, and is expected to have free cash flow of $ 9 million next year. Its FCF is then expected to grow at a rate of 3 % per year forever. If Portage​ Bay's equity cost of capital is 9 % and it has 4 million shares​ outstanding, what should be the price of Portage Bay​ stock?

Answer 1

$37.75

Step-by-step explanation:

In order to find the stock price we need to calculate the firm value.

Firm value:

`=(FCF)/(WACC-Growth)`

`=(9,000,000)/(9\ percent-3\ percent)`

`=(9,000,000)/(6\ percent)`

= $150,000,000

Therefore, the stock price is as follows:

`=(Firm\ value+Excess\ cash\ value)/(Shares\ outstanding)`

`=(150,000,000+1,000,000)/(4,000,000)`

`=(151,000,000)/(4,000,000)`

= $37.75

Therefore, the price of Portage Bay​ stock is $37.75