Final answer:
To determine the predicted stock price for ZNC, we calculate the present value of $110 million free cash flows for the first three years and the present value of the growing perpetuity from year 4, using a 15% discount rate. Then, we divide the total present value by the number of shares outstanding (20 million) to find the price per share. The example provided in the question is not related to the actual ZNC calculation.
Step-by-step explanation:
To estimate the predicted price of the stock for ZNC, we must calculate the present value (PV) of the free cash flow to equity holders for the first three years and then calculate the present value of the growing perpetuity that starts from year 4. The free cash flows for years 1-3 are constant at $110 million. As for the terminal value (TV) which represents the present value of all subsequent cash flows beyond year 3 growing at a perpetual rate of 2%, this is calculated using the Gordon Growth Model (GGM).
The formula for the TV in year 3 is:
TV = (Free Cash Flow Year 3 * (1 + growth rate)) / (cost of equity - growth rate),
TV = ($110 million * (1 + 0.02)) / (0.15 - 0.02).
Next, we need to discount these values back to present values using the cost of equity of 15%. The present value of the terminal value has to be calculated as of year 3 since this is the year after which the growth starts. After we've calculated the PVs, we sum them up to get the total PV of future cash flows.
Finally, to find the predicted price per share, we divide the total PV of the free cash flow to equity by the number of shares outstanding, which in this case is 20 million. This will give us the value per share that you could expect the stock to trade at, given these projections and assumptions.
The example provided with Babble, Inc. is incorrect and not relevant to our calculation, as it reflects a completely different scenario and figures which do not pertain to the ZNC's case.
It's important to note that the earlier example of the price per share calculation that mentions "51.3 million/200 = 0.2565 million" is not correctly scaled, as 0.2565 million would be $256,500 per share, which is highly unrealistic for a stock price and likely a result of a typo or calculation error. For an accurate price prediction, the methods described above should be followed without referencing incorrect examples.