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River Enterprises has ​$490 million in debt and 21 million shares of equity outstanding. Its exce...

River Enterprises has ​$490 million in debt and 21 million shares of equity outstanding. Its exce

ss cash reserves are $ 14 million. They are expected to generate ​$208 million in free cash flows next year with a growth rate of 2​% per year in perpetuity. River​ Enterprises' cost of equity capital is 12​%. After analyzing the​ company, you believe that the growth rate should be 3​% instead of 2​%. How much higher​ (in dollars) would the price per share be if you are​ right? If the growth rate is 2​%, the price per share is ​$ nothing. ​(Round to the nearest​ cent.)

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Answer #1

Value of firm = present value of free cash flows + excess cash

At 2%

= 208 million/(12%-2%)+14

=$2,094 million

Less: value of debt =$490 million

Value of equity =$1604 million

Price per share = 1604 million/21 million

=$76.38

At 3%

Value of firm = 208/9% +14

=$2325.11 million

Value per share =(2325.11-490)/21

=$87.39

Hence, the difference will be =$11.01

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