Question

Choro Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 3% per year. If the weighted average cost of capital is 7% and Conundrum has cash of $80 million, debt of $60 million, and 30 million shares outstanding, what is Choro's expected current share price

Answer 1

Answer: $19.85

Step-by-step explanation:

Expected current share price = (Present value of free cash flows + Cash holdings - Debt) / Shares outstanding

Present value of free cash flows.

Present value = Year 1 present value + Year 2 present value + Year 3 present value + Year 4 present value + Present value of Terminal value

Terminal value = (Free cash flow * (1 + growth rate)) / (Cost of capital - growth rate)

= (26 * 1.03) / (7% - 3%)

= $669.5‬0

Present value = (12 / 1.07) + (18/ 1.07²) + (22 / 1.07³) + (26 / 1.07⁴) + (669.50 / 1.07⁴)

= $575.49 million

Expected current price = (575.49 + 80 - 60) / 30

= $19.85