Question

You are valuing a company that is projected to generate a free cash flow of $10 million next year, growing at a stable 3.0% rate in perpetuity thereafter. The company has $22 million of debt and $8.5 million of cash. Cost of capital is 10.0%. There are 50 million shares outstanding. How much is each share worth according to your valuation analysis

Answer 1

$2.67 per share

Step-by-step explanation:

To start with,we calculate the present worth of the company using the below formula:

present worth of the company=free cash flow*(1+g)/r-g

g is the growth rate of the free cash flow which is 3.0%

r is the cost of capital of 10%

present worth=$10 million*(1+3%)/10%-3%

=10.3/7%

=$ 147.14 million

However ,the value of total equity is computed thus:

equity=present worth+cash-debt

cash is $8.5 million

debt is $22 million

equity=$ 147.14 +$8.5-$22

equity=$133.64 million

value of each share=equity value /number of shares

number of shares is 50 million

value of each=$133.64 million/50 million=$2.67 per share