Question

Hallowell Inc. has free cash flow of​ $2.5 million and 1.25 million shares outstanding. If you believe the price to cash flow ratio for this company should be​ 11, what is the highest price you should pay for the​ stock?

Answer 1

The highest price I should pay for the​ stock is $22.

Step-by-step explanation:

The cash flow is the net cash flow produced from the operations of the company after paying all the operational and capital expenditures. It is the cash which can be distributed between any security-holders and stockholders.

According to given data

Free cash flow = 2.5 million

Outstanding shares = 1.25 million

Cash flow for each share = Free cash flow / outstanding shares = 2.5 million / 1.25 million = $2 per share

Price to cash flows ratio = price of share / cash flow per share

11 = Price of share / $2 per share

Price of share = 11 x $2 = $22