Question

​covan, inc. is expected to have the following free cash​ flow: loading.... a. covan has million shares​ outstanding, ​$ million in excess​ cash, and it has no debt. if its cost of capital is ​, what should be its stock​ price? b. covan adds its fcf to​ cash, and has no plans to add debt. if you plan to sell covan at the beginning of year​ 2, what is its expected​ price? c. assume you bought covan stock at the beginning of year 1. what is your expected return from holding covan stock until year​ 2?

Answer 1

To determine the stock price per share, we calculate the present discounted value (PDV) of the expected future profits of Babble, Inc. Using a 15% interest rate and adding up the PDVs of each year's profit, the price per share is determined to be $210,000 per share.

Step-by-step explanation:

To determine the price per share of Babble, Inc.'s stock, we need to calculate the present discounted value (PDV) of the expected future profits. Using a 15% interest rate, we can calculate the PDV for each year's profit and then add them up. The PDVs are $13 million for the first year, $14 million for the second year, and $15 million for the third year. Adding these PDVs gives us a total of $42 million. Finally, we divide this total by the number of shares (200) to get the price per share, which is $210,000 per share.

Answer 2

An investor should be willing to pay approximately $256,500 per share for stock in Babble, Inc., when applying the present discounted value methodology, assuming a 15% discount rate and considering the expected future dividends.

Step-by-step explanation:

To determine the price an investor should pay for a share of Babble, Inc., we apply the concept of Present Discounted Value (PDV). This considers the expected future dividends and discounts them by an appropriate interest rate to get their value in today's terms. Assuming a 15% interest rate, the present value of the profits is $15 million for year 0, $(20 million / (1+0.15)) for year 1, and $(25 million / (1+0.15)^2) for year 2. Once we calculate the present values for each of these future profits, we combine them to obtain the total PDV of future profits.

Calculating the PDV of each profit tranche:

• Immediate profit PDV: $15 million
• Year 1 profit PDV: $20 million / 1.15 ≈ $17.39 million
• Year 2 profit PDV: $25 million / (1.15^2) ≈ $18.91 million

Adding these up gives a total PDV:

$15 million + $17.39 million + $18.91 million ≈ $51.3 million

To find the price per share, divide the PDV of total profits by the number of shares. Using 200 shares, we have:

Price per share = PDV of total profits / Number of shares

Price per share ≈ $51.3 million / 200 = $0.2565 million or $256,500 per share.