Question

The firm's free cash flow is expected to grow at a constant rate, hence we can apply a constant growth formula to determine the total value of the firm. Firm value = FCF1/(WACC - gFCF) = $125,000,000/(0.13 - 0.03) = $1,250,000,000.00. To find the value of an equity claim upon the company (share of stock), we must subtract out the market value of debt and preferred stock. This firm happens to be entirely equity funded, so this step is unnecessary here. Hence, to find the value of a share of stock, we divide equity value (or in this case, firm value) by the number of shares outstanding. Equity value per share = Equity value/Shares outstanding = $1,250,000,000.00/40,000,000 = $31.25. Each share of common stock is worth $31.25, according to the corporate valuation model.

Answer 1

To determine the value of a firm and the value of a share of stock, the constant growth formula and equity valuation formula are applied respectively.

Step-by-step explanation:

The subject of this question is Business, specifically corporate valuation and the determination of stock value.

To determine the total value of a firm, the constant growth formula is applied using the firm's free cash flow and the weighted average cost of capital (WACC) minus the growth rate of the free cash flow. This formula helps calculate the firm's value, which in this case is $1,250,000,000.00.

To find the value of a share of stock in an equity-funded firm, the market value of debt and preferred stock is subtracted from the firm value. In this case, since the firm is entirely equity funded, this step is unnecessary. The value of each share of common stock is then determined by dividing the equity value (or firm value) by the number of shares outstanding, resulting in $31.25 per share.