Question

You must estimate the value of Noe Technologies’ stock. The end-of-year free cash flow (FCF1) is expected to be $27.50 million, and it is expected to grow at a constant rate of 5.0% a year thereafter. The company’s WACC is 10.0%, it has $150.0 million of long-term debt plus preferred stock outstanding, and there are 20.0 million shares of common stock outstanding. What is the firm's estimated value per share of common stock? (7 points)

Answer 1

The estimated value per share of common stock is $20

Step-by-step explanation:

The FCF or free cash flow to the firm can be used to calculate the value of a firm based on the present value of the expected future FCFs. The formula for value of the firm under a constant growth FCF model is,

Value = FCF1 / (WACC - g)

Where,

• FCF1 is the free cash flow for the next period
• WACC is the weighted average cost of capital
• g is the growth rate in FCF

Value of firm = 27.5 / (0.1 - 0.05)

Value of firm = $550 million

The value of equity which is the value of common equity can be calculated by deducting the market value of debt from the value of the firm

The value of equity = 550 - 150 = $400 million

The value per share can be calculated by dividing the value of equity by the number of common shares outstanding.

Value per share = 400 / 20

Value per share = $20 per share