Question

Venice Surf Co. expects to generate free cash flows over the next three years of $22 million, $31 million, and $42 million, respectively. In addition, the terminal value of all free cash flows expected to be generated after Year 3 is $436 million. The company's nonoperating assets equal \$41 million and its nonoperating liabilities equal \$185 million. There are 17 million shares outstanding. Estimate the value of each share of common stock using the free cash flow data provided, and assuming a weighted average cost of capital of 11%. Present your answer to two decimal places, e.g., $23.45.

Answer 1

To estimate the value of each share of common stock, you need to calculate the present value of the expected free cash flows and the terminal value. Then, you add up all the present values and divide by the number of shares to get the value per share.

Step-by-step explanation:

To estimate the value of each share of common stock, we need to calculate the present value of the expected free cash flows. We will use the formula:

Present Value = Future Cash Flow / (1 + Discount Rate)^(Year - Current Year)

For the first year, the present value would be $22 million / (1 + 0.11)^1 = $19.82 million. For the second year, it would be $31 million / (1 + 0.11)^2 = $24.25 million. And for the third year, it would be $42 million / (1 + 0.11)^3 = $30.59 million. Additionally, we need to calculate the present value of the terminal value, which would be $436 million / (1 + 0.11)^3 = $305.42 million.

Next, we add up all the present values:

$19.82 million + $24.25 million + $30.59 million + $305.42 million = $380.08 million.

Finally, we divide the total present value by the number of shares:

$380.08 million / 17 million shares = $22.36 per share.