Question

Sah Inc's last free cash flow was $1.75 million. Its free cash flow growth rate is expected to be constant at 25% for 2 years, after which free cash flows are expected to grow at a rate of 6% forever. Its weighted average cost of capital WACC is 12%. Huxley has $5 million in short-term investments and $7 million in debt and has 2 million shares outstanding. What is the best estimate of the current intrinsic stock price

Answer 1

$40.64 per share

Step-by-step explanation:

The computation of the best estimate of the current intrinsic stock price is given below;

Enterprise value is

= ($1.75 × (1.25)) ÷ (1.12)^1 + ($1.75 × (1.25)^2) ÷ (1.12)^2 + (($1.75 × (1.25)^2 × 1.06) ÷ 0.06) ÷ (1.12)^2

= $42.64 million

now

market cap = enterprise value - debt + investments

= $42.64 - $7 + $5

= $40.64 million

Now finally

price = $40.64 million ÷ 1million

= $40.64 per share