Question

Brennan Corporation's WACC is 10.00%, its end-of-year free cash flow (FCF1) is expected to be $75.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the future. The company has 20 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock? Assume the firm has no debt or preferred stock outstanding.

Answer 1

$75 per stock

Step-by-step explanation:

we can use the Gordon growth model to determine the price of the company:

company's total value = future cash flow / (WACC - growth rate)

company's total value = $75,000,000 / (10% - 5%) = $75,000 / 5%

company's total value = $1,500,000,000

to determine the price of each stock:

stock price = company's total value / total stocks outstanding

stock price = $1,500,000,000 / 20,000,000 million stocks = $75 per stock

Answer 2

$75 million

Step-by-step explanation:

Firm's value = FCF1 / WACC - growth

Equity Value = Firm's value - Debt value

Intrinsic value per share = Equity Value / Number of shares

Therefore Firm's value = $75.0 million / (0.10 - 0.05) = $1,500 million

Equity Value = Firm's value - Debt value = $1500 - 0 debt = $1,500 million

Intrinsic value per share = Equity Value of $1500 / 20 million shares =

$75 million