Question

Calculate the current value of a share of sundanci stock based on the two-stage fcfe model.

Answer 1

To calculate the current value of a share of Sundanci stock using the two-stage FCFE model, you need to perform present value calculations for different time periods and divide the total present value of profits by the number of shares.

Step-by-step explanation:

To calculate the current value of a share of Sundanci stock based on the two-stage FCFE (Free Cash Flow to Equity) model, you need to perform present value calculations for the different time periods. These calculations determine the worth of future amounts in the present, taking into account a given interest rate. Add up all the present values for the different time periods and then divide the present value (PV) of total profits by the number of shares to get the price per share. For example, if the PV of total profits is $51.3 million and there are 200 shares, the price per share would be about $256,500.

It's important to note that expected profits in the real world are estimates, and the interest rate used in the calculation is a crucial decision that can significantly impact the result.

Answer 2

The current value of a share of Sundanci stock is $13.16 per share.

How to solve

Step 1: Calculate the Free Cash Flows in Years 1 and 2

Year FCF

0 $100 million

1 $100 million * (1 + 20%) = $120 million

2 $120 million * (1 + 5%) = $126 million

Step 2: Calculate the Present Value of the Free Cash Flows in Years 1 and 2

Year FCF WACC PV(FCF)

1 $120 million 10% $109.09 million

2 $126 million 10% $105.45 million

Step 3: Calculate the Present Value of the Terminal Value

Terminal year Terminal value WACC Terminal growth rate PV(Terminal value)

Year 3 $126 million * (1 + 5%) = $132.30 million 10% 3% $1,102.55 million

Step 4: Calculate the Current Value of a Share of Sundanci Stock

Current value per share = PV(FCF1) + PV(FCF2) + PV(Terminal value) / Shares outstanding

Current value per share = $109.09 million + $105.45 million + $1,102.55 million / 100 million shares

Current value per share = $13.16 per share

Therefore, the current value of a share of Sundanci stock is $13.16 per share.

The Complete Question

Sundanci, a fast-growing technology company, is expected to have a free cash flow (FCF) of $100 million in year 0. Analysts forecast a growth rate of 20% in year 1, followed by a steady growth rate of 5% thereafter. The company's weighted average cost of capital (WACC) is 10%, and the terminal growth rate is assumed to be 3%. Determine the current value of a share of Sundanci stock if there are 100 million shares outstanding.