Final answer:
To calculate Huxley Building Supplies' intrinsic stock price, we discount the future free cash flows at a growth rate of 25% for 2 years and 7% in perpetuity at the WACC of 13%, then adjust for short-term investments and debt, and divide by 1 million shares.
Step-by-step explanation:
To estimate the current intrinsic stock price of Huxley Building Supplies, we need to calculate the present value of the expected free cash flows. The company's last free cash flow was $1.7 million, with an expected growth rate of 25% for 2 years, and then a perpetual growth rate of 7%. Using the Weighted Average Cost of Capital (WACC) of 13% to discount the future cash flows, we can find the present values of these growth periods.
The formula for the present value of a growing perpetuity is FCF/(WACC-g), where FCF is the free cash flow at the end of the growth period and g is the perpetual growth rate. For the first two years, we calculate the future free cash flows and then bring them to present value using the WACC of 13%. After the initial high-growth period, the free cash flow will grow at a perpetual rate of 7%, which we also need to discount to present value.
Adding the present values of all future free cash flows and incorporating Huxley's short-term investments and debt gives us the total company value. Dividing this by the number of outstanding shares (1 million), gives us an estimated intrinsic stock price.