Question

Flying Cow Aviation Inc.’s free cash flows (FCFs) are expected to grow at a constant long-term growth rate (gLgL) of 14% per year into the future. Next year, the company expects to generate a free cash flow of $8,000,000. The market value of Flying Cow’s outstanding debt and preferred stock is $51,428,571 and $28,571,429, respectively. Flying Cow has 6,750,000 shares of common stock outstanding, and its weighted average cost of capital (WACC) is 21%.Given the preceding information, complete the adjacent table (rounding each value to the nearest whole dollar), and assuming that the firm has not had any nonoperating assets in its balance sheet.

Answer 1

To calculate the price per share of Flying Cow Aviation Inc., we need to calculate the present value of the future cash flows. First, we calculate the present value of the expected free cash flows using the constant growth rate formula. Next, we calculate the total present value of the cash flows. Finally, we divide the total present value by the number of shares to get the price per share.

Step-by-step explanation:

In order to calculate the price per share of Flying Cow Aviation Inc., we need to calculate the present value of the future cash flows. First, we need to calculate the present value of the expected free cash flows using the constant growth rate formula:PV = FCF / (WACC - g)

Where PV is the present value, FCF is the free cash flow, WACC is the weighted average cost of capital, and g is the growth rate. Using this formula, we can calculate the present value for each year:

1. PV1 = $8,000,000 / (0.21 - 0.14) = $50,000,000
2. PV2 = $8,000,000 * (1 + 0.14) / (0.21 - 0.14) = $64,000,000
3. Next, we calculate the total present value of the cash flows:

Total PV = PV1 + PV2 = $50,000,000 + $64,000,000 = $114,000,000

Finally, we divide the total present value by the number of shares to get the price per share:

Price per share = Total PV / Number of shares = $114,000,000 / 6,750,000 = $16.89