Question

Suppose GM is expected to have an enterprise value (PV of FCFF) of $100 billion, but has $47 billion in debt. Given shares outstanding of 2 billion, what should be their stock price under the enterprise valuation approach?

a) $26.50
b) $37.50
c) $52.50
d) $63.50

Answer 1

The stock price under the enterprise valuation approach should be $26.50.

Step-by-step explanation:

To calculate the stock price under the enterprise valuation approach, we need to subtract the debt from the enterprise value and divide it by the number of shares outstanding.

Enterprise Value = PV of FCFF

Given that the enterprise value is $100 billion and the debt is $47 billion, the equity value is $100 billion - $47 billion = $53 billion.

Next, divide the equity value by the number of shares outstanding (2 billion).

Stock Price = Equity Value / Shares Outstanding

Stock Price = $53 billion / 2 billion = $26.50

Therefore, the stock price should be $26.50 (option a).