Question

Assume that Genentech's projected free cash flow for next year is FCF, - $10,000,000, and FCF is expected to grow at a constant rate of 5.5%. The company's weighted average cost of capitalis 9.5% and it has no debtor preferred stock. Using the corporate valuation model, Genentech has 20 million shares outstanding, determine the stock's value per share. Hint: First find the total market value for Genentech using the corporate valuation model $13.25 $12.50 514.75 $16.00

Answer 1

Stock Value per share using corporate valuation model

Total Firm Value

Here, we’ve Free Cash Flow for the next year (FCF1) = $10,000,000

Weighted Average Cost of Capital (WACC) = 9.50%

Growth Rate (g) = 5.50% per year

Therefore, the Total Firm Value = FCF1 / (WACC – g)

= $10,000,000 / (0.0950 – 0.0550)

= $10,000,000 / 0.04

= $25,000,000

The Value of Common Equity

Value of Common Equity = Total Firm Value - Market Value of Debt – Amrket Value of Preferred Stock

= $25,000,000 - $0 - $0

= $25,000,000

Stock value per share

The Stock value per share = The Value of Common Equity / Number of shares of common stock outstanding

= $25,000,000 / 2,00,00,000 Shares outstanding

= $12.50 per share

“Hence, the Stock Value per share using corporate valuation model will be $12.50”