Question

xyz industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 4% per year. if the weighted average cost of capital is 9% and xyz has cash of $18 million, debt of $31 million, and 74 million shares outstanding, what is general industries' expected current share price? enter your answer in dollars and round to the nearest cent. do not include the dollar sign ($).

Answer 1

To calculate XYZ industries' expected current share price, we must compute the present value of future free cash flows using the 9% WACC and the Gordon Growth Model for the terminal value. After obtaining the total present value, subtract net debt from it to obtain the equity value, and divide by the number of shares to get the price per share.

-
`\(CF_1 = \$22 \text{ million}\)`

-
`\(CF_2 = \$26 \text{ million}\)`

-
`\(CF_3 = \$28 \text{ million}\)`

-
`\(CF_4 = \$31 \text{ million}\)`

-
`\(CF_5 = \$33 \text{ million}\)`

- Growth rate
`(\(g\))` = 4%

-
`\(r\)` (WACC) = 9%

-
`\(Cash = \$18 \text{ million}\)`

-
`\(Debt = \$31 \text{ million}\)`

- Shares Outstanding = 74 million

Now, let's calculate the present value
`(\(PV\))` of the free cash flows over the next five years:

`\[ PV = (22)/((1+0.09)^1) + (26)/((1+0.09)^2) + (28)/((1+0.09)^3) + (31)/((1+0.09)^4) + (33)/((1+0.09)^5) \]`

Calculating each term:

`\[ PV = (22)/(1.09) + (26)/((1.09)^2) + (28)/((1.09)^3) + (31)/((1.09)^4) + (33)/((1.09)^5) \]`

`\[ PV \approx \$19.45 + \$21.57 + \$22.17 + \$22.94 + \$23.66 \]`

`\[ PV \approx \$109.79 \text{ million} \]`

Next, let's calculate the terminal value
`(\(TV\))` at the end of year 5:

`\[ TV = (33 * (1+0.04))/(0.09-0.04) \]`

`\[ TV = (33 * 1.04)/(0.05) \]`

`\[ TV \approx (34.32)/(0.05) \]`

`\[ TV \approx \$686.40 \text{ million} \]`

Now, calculate the present value of the terminal value
`(\(PV_(TV)\))`:

`\[ PV_(TV) = (TV)/((1+0.09)^5) \]`

`\[ PV_(TV) = (686.40)/((1.09)^5) \]`

`\[ PV_(TV) \approx (686.40)/(1.53862) \]`

`\[ PV_(TV) \approx \$445.76 \text{ million} \]`

Finally, calculate the total present value
`(\(Total PV\))`:

`\[ Total PV = PV + PV_(TV) \]`

`\[ Total PV = \$109.79 + \$445.76 \]`

`\[ Total PV \approx \$555.55 \text{ million} \]`

Now, calculate the equity value:

`\[ Equity Value = Total PV - Debt + Cash \]`

`\[ Equity Value = \$555.55 - \$31 + \$18 \]`

`\[ Equity Value \approx \$542.55 \text{ million} \]`

Finally, find the expected current share price:

`\[ Share Price = (Equity Value)/(Shares Outstanding) \]`

`\[ Share Price = \frac{\$542.55 \text{ million}}{74 \text{ million}} \]`

`\[ Share Price \approx \$7.34 \]`

So, XYZ Industries' expected current share price is approximately $7.34 per share.

Complete Question :

Year 1 2 3 4 5

Fresh Cash Flow $22 million $26 million $28 million $31 million $ 33 million

XYZ industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 4% per year. if the weighted average cost of capital is 9% and XYZ has cash of $18 million, debt of $31 million, and 74 million shares outstanding, what is general industries' expected current share price?

Answer in dollars and round to the nearest cent.