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River Enterprises has $492 million in debt and 21 million shares of equity outstanding. Its excess...

River Enterprises has $492 million in debt and 21 million shares of equity outstanding. Its excess cash reserves are $16 million. They are expected to generate $196 million in free cash flows next year with a growth rate of 2​% per year in perpetuity. River​ Enterprises' cost of equity capital is 12​%. After analyzing the​ company, you believe that the growth rate should be 3​% instead of 2​%. How much higher​ (in dollars) would the price per share be if you are​ right? If the growth rate is 2​%, the price per share is? (Round to the nearest​ cent.)

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Answer #1

Price per share = (Present value of free cash flows + Excess cash – Value of debt)/Number of shares

At 2% growth rate

Price = (196 million/(12%-2%) + 16 – 492)/21

= $70.67

At 3% growth rate

Price = (196/(12%-3%) + 16-492)/21

= $81.04

Higher price = $10.37

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