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XYZ corporation is expecting free cash flow of $100 million next year, and it will grow by 3% per year indefinitely afterward

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Answer #1

Expected Free cashflow to firm (CF1) = $100 million

Long Term Growth rate (g) = 3%

XYZ's discount rate (K) = 12%

Using Gordon's dividend growth model,

Value of firm = CF1 / (k-g)

Value of firm = 100 / (12%-3%)

Value of firm = $ 1,111.111 million

Market value of outstanding bonds = $300

Value of Equity = Value of firm - Market value of o/s bonds

Value of Equity = 1111.111-300 = $ 811.111 million

No of shares outstanding = 10 million

Value per share = $811.111 million / 10 million shares = $ 81.11 per shares

Thumbs up please if satisfied. Thanks :)

Comment if further doubts in above

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