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A firm forecasts that it will have the free cash flows (in millions) shown below. Year 1 2 3 Free cash flow −$20.00 $48.00 $54.00 a. If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at 12.5% what is the firm's total corporate value, in millions? b. What should the stock price be if the firm has $1,500 million in debt and 5 million shares outstanding?

User Wertzui
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a. To calculate the total corporate value, we need to find the present value of each free cash flow and add them up. The formula for the present value of a future cash flow is:

PV = FV / (1 + r)^n

Where PV is the present value, FV is the future value, r is the discount rate, and n is the number of periods.

Using this formula, we can calculate the present value of each free cash flow:

PV1 = $20.00 / (1 + 0.14)^1 = $17.54 million
PV2 = $48.00 / (1 + 0.14)^2 = $33.19 million
PV3 = $54.00 / (1 + 0.14)^3 = $33.13 million

Next, we need to calculate the present value of all future free cash flows beyond year 3, using the formula:

PV4 = FCF4 / (r - g)

Where FCF4 is the free cash flow in year 4, r is the discount rate, and g is the growth rate. Since the free cash flows are expected to continue growing at 12.5%, we can use this as the growth rate. We don't know the exact value of FCF4, but we can estimate it by using the free cash flow in year 3 and assuming that it will continue to grow at the same rate. Therefore:

FCF4 = FCF3 x (1 + g) = $54.00 x (1 + 0.125) = $61.13 million

Now we can calculate the present value of all future free cash flows beyond year 3:

PV4 = $61.13 million / (0.14 - 0.125) = $611.25 million

Finally, we can calculate the total corporate value by adding up the present values of all free cash flows:

Total corporate value = PV1 + PV2 + PV3 + PV4 = $97.01 million

Therefore, the firm's total corporate value is $97.01 million.

b. To calculate the stock price, we need to subtract the value of the debt from the total corporate value, and divide by the number of shares outstanding:

Stock price = (Total corporate value - Value of debt) / Number of shares outstanding

Using the total corporate value from part (a), the value of the debt is $1,500 million, and the number of shares outstanding is
User CyanRook
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