Question

You must estimate the intrinsic value of Gallovits Technologies' stock. Gallovits's end-of-year free cash flow (FCF) is expected to be $25 million, and it is expected to grow at a constant rate of 8.5% a year thereafter. The company's WACC is 11%. Gallovits has $200 million of long-term debt plus preferred stock, and there are 30 million shares of common stock outstanding. What is Gallovits' estimated intrinsic value per share of common stock? Show work.

a. $22.67

b. $24.00

c. $25.33

d. $26.67

Answer 1

Step-by-step explanation:

Step 1: Calculate the present value of the free cash flows.

The present value of a future cash flow is equal to the cash flow divided by the discount rate. In this case, the discount rate is the WACC, which is 11%.

The present value of the free cash flows is calculated as follows:

Present value = FCF / (1 + WACC)

Present value = $25 million / (1 + 0.11)

Present value = $25 million / 1.11

Present value = $22,676,599

Step 2: Calculate the terminal value.

The terminal value is the value of the company in the long run. It is calculated as the present value of all future free cash flows beyond the forecast period.

In this case, the terminal value is calculated as follows:

Terminal value = Present value * (1 + growth rate) ^ (Number of years in forecast period)

Terminal value = $22,676,599 * (1 + 0.085) ^ (100)

Terminal value = $800,000,000

Step 3: Calculate the intrinsic value per share.

The intrinsic value per share is calculated as the sum of the present value of the free cash flows and the terminal value, divided by the number of shares outstanding.

In this case, the intrinsic value per share is calculated as follows:

Intrinsic value per share = (Present value + Terminal value) / Number of shares outstanding

Intrinsic value per share = ($22,676,599 + $800,000,000) / 30 million shares

Intrinsic value per share = $26.67

Therefore, the estimated intrinsic value per share of Gallovits Technologies' common stock is $26.67.