Question

Lockeran Co. has the following projected sales, costs, net investment and free cash flows in millions. The anticipated growth rate in free cash flows after year 6 is 3% per year forever. there are 3 million shares outstanding and investors require a return of 8% on the company's stock. Using the constant growth model to find the terminal value, calculate the price of the company's stock.

Answer 1

$278.75 per stock

Step-by-step explanation:

FCF1 = $31.17 million

FCF2 = $35.54 million

FCF3 = $39.80 million

FCF4 = $43.78 million

FCF5 = $47.27 million

FCF6 = $50.11 million

since the FCF6 will grow at a constant 3% rate forever, then we can use the constant growth model to determine the price of the company at year 6, then we must discount it along with the rest of the cash flows:

company's value = ($50.11 x 1.03) / (8% - 3%) = $1,032.27 million

now we can discount the FCFs:

$31.17/1.08 + $35.54/1.08² + $39.80/1.08³ + $43.78/1.08⁴ + $47.27/1.08⁵ + $50.11/1.08⁶ + $1,032.27/1.08⁶ = $28.86 + $29.37 + $31.59 + $32.18 + $32.17 + $31.58 + $650.51 = $836.26 million

price per stock = $836.26 million / 3 million stocks = $278.75 per stock