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Consider a company that is forecasted to generate free cash flows of $25 million next year and $27 million the year after. After that, cash flows are projected to grow at a stable rate of 1.8% in perpetuity. The company's cost of capital is 12.7%. The company has $51 million in debt, $16 million of cash, and 15 million shares outstanding. How much is each share worth? Round to one decimal place.

User Niv
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The value of each share can be calculated using the discounted cash flow (DCF) method. To do this, we need to calculate the present value of the projected cash flows.

Step 1: Calculate the present value of the cash flows
- The cash flow for the first year is $25 million.
- The cash flow for the second year is $27 million.
- The cash flows from year 3 onwards are growing at a stable rate of 1.8% in perpetuity.

To calculate the present value, we use the formula:
PV = CF / (1 + r)^n
where PV is the present value, CF is the cash flow, r is the discount rate (cost of capital), and n is the time period.

Using this formula, we calculate the present value of the cash flows as follows:
PV1 = $25 million / (1 + 0.127)^1 = $22.12 million
PV2 = $27 million / (1 + 0.127)^2 = $22.75 million
PV3 onwards = $27 million * (1 + 0.018) / (0.127 - 0.018) = $303.55 million

Step 2: Calculate the total present value
Total present value = PV1 + PV2 + PV3 onwards = $22.12 million + $22.75 million + $303.55 million = $348.42 million

Step 3: Deduct the net debt from the total present value
Net debt = Total debt - Cash = $51 million - $16 million = $35 million

Total equity value = Total present value - Net debt = $348.42 million - $35 million = $313.42 million

Step 4: Calculate the value per share
Value per share = Total equity value / Number of shares = $313.42 million / 15 million shares ≈ $20.89

Therefore, each share is worth approximately $20.89.

It's important to note that this calculation is based on certain assumptions and projections, and it represents an estimation of the value per share. The actual value may differ due to various factors and market conditions.

Answer in 200 words

User Rjv
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