Final answer:
To estimate the company's stock price, calculate the present value of projected cash flows and terminal value. Multiply the estimated stock price by the exit multiple to get the exit enterprise value. Divide the exit enterprise value by the number of shares to get the final estimate of the stock price.
Step-by-step explanation:
To estimate the company's stock price, we need to calculate the present value of its projected free cash flows and the present value of the terminal value. The present value of cash flows is calculated by dividing each year's cash flow by the cost of capital and discounting it back to the present.
In this case, the free cash flow for next year is $25 million, and for the year after is $29 million. Assuming a stable growth rate, we can calculate the terminal value by dividing the cash flow two years from now by the difference between the cost of capital and the growth rate.
Adding the present values of the cash flows and the terminal value, we can estimate the enterprise value. We can then divide the enterprise value by the number of outstanding shares to get the estimated stock price. In this case, the exit multiple for the company's free cash flows is 17, so we can multiply the estimated stock price by this multiple to get the exit enterprise value. Finally, we divide the exit enterprise value by the number of shares to get the final estimate of the company's stock price.