Question

covan reinvests all its fcf and has no plans to add debt or change its cash holdings (it does not invest its cash holdings). if you plan to sell covan at the beginning of year 2, what is its expected price? if you plan to sell covan at the beginning of year 2, its price should be $

Answer 1

If Covans reinvests all its FCF and has no plans to add debt or change its cash holdings, the expected price of Covan at the beginning of year 2 can be estimated using the Gordon Growth Model.

Step-by-step explanation:

If Covans reinvests all its Free Cash Flow (FCF) and has no plans to add debt or change its cash holdings, this means that its FCF will continuously be reinvested in the business. In this case, the expected price of Covan at the beginning of year 2 can be estimated using the Gordon Growth Model. The formula for the Gordon Growth Model is:

Expected Price = FCF1 / (k - g)

Where:

• FCF1 is the expected Free Cash Flow at year 1
• k is the required rate of return for investors
• g is the expected growth rate of the company

By plugging in the relevant values into the formula, you can calculate the expected price of Covan at the beginning of year 2