Question

A company is projected to have a free cash flow of $329 million next year, growing at a 5.7% rate until the end of year 3.

After that, cash flows are expected to grow at a stable rate of 2.1%.

The company's cost of capital is 13.3%.

The company owes $64 million to lenders and has $18 million in cash.

If it has 214 million shares outstanding, what is your estimate for its stock price? Round to one decimal place.

Answer 1

$14.35

Step-by-step explanation:

Firstly, we need to calculate enterprise value (EV) of this company, which is equal to present value of all free cashflows (CF):

• Terminal value of free cashflow at year 3 = Year 4 CF/(Cost of capital - Long-term growth) = [329 x (1 + 5.7%)^2 x (1 + 2.1%)]/(13.3% - 2.1%) = $3,350.84
• EV of the company = 329/(1 + 13.3%) + [329 x (1 + 5.7%)]/(1 + 13.3%)^2 + [329 x (1 + 5.7%)^2 + 3,350.84]/(1 + 13.3%)^3 = $3,117.91

Secondly, we calculate equity value as below:

EV = Equity value + Net debt = Equity value + (Debt - Cash), or:

3,117.91 = Equity value + (64 - 18), or Equity value = $3,071.91.

Finally, stock price of the company = Equity value/Number of shares = 3,071.91/214 = $14.35.