Question

A company is projected to generate free cash flows of $357 million next year, growing at a 6% rate until the end of year 3. After that, cash flows are expected to grow at a stable rate of 2.4% in perpetuity. The company's cost of capital is 9.1%. The company owes $96 million to lenders and has $14 million in cash. If the company has 207 million shares outstanding, what is your estimate for its stock price

Answer 1

$27.02

Step-by-step explanation:

Year a Cash flow b Discount factor (c = 1.091^-a) Present Value d=b*c

1 $357.00 0.9165903 $327.22

2 $378.42 0.8401377 $317.92

3 $401.13 0.7700621 $308.89

Total $954.04

Present value of after year 3 cash flows:

Present value = CF3*(1+g)/(Ke-g)*DF3; where CF3 =$401.13, g = 2.40%, Ke = 9.10%, DF3 = 0.770062,

Present value = $4,720.97

Present value of all cash flows:

Present value of cash flows = $954.04 + $4,720.97 + $14.00

Present value of cash flows = $5,689

Calculation of value per share:

Value of firm = $5,689.00

Less: Value of debt = $96.00

Value of equity $5,593.00

/ No. of shares 207

Value per share $27.02