Question

Assume that today is December 31, 2019, and that the following information applies to Abner Airlines: After-tax operating income [EBIT(1 - T)] for 2020 is expected to be $500 million. The depreciation expense for 2020 is expected to be $90 million. The capital expenditures for 2020 are expected to be $350 million. No change is expected in net operating working capital. The free cash flow is expected to grow at a constant rate of 4% per year. The required return on equity is 14%. The WACC is 12%. The firm has $206 million of non-operating assets. The market value of the company's debt is $2.547 billion. 230 million shares of stock are outstanding. Using the corporate valuation model approach, what should be the company's stock price today? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Expected Free Cash Flow, FCF1 = EBIT * (1 - T) + Depreciation Expense - Capital Expenditures - Change in Net Operating Working Capital
Expected Free Cash Flow, FCF1 = $500 million + $90 million - $350 million - $0
Expected Free Cash Flow, FCF1 = $240 million

Growth Rate, g = 4%
Required Return, rs = 14%

Enterprise Value = FCF1 / (rs - g)
Enterprise Value = $240 million / (0.14 - 0.04)
Enterprise Value = $2,400 million

Value of Equity = Enterprise Value - Value of Debt + Value of Non-Operating Assets
Value of Equity = $2,400 million - $2,547 million + $206 million
Value of Equity = $59 million

Stock Price = Value of Equity / Number of Shares Outstanding
Stock Price = $59 million / 230 million
Stock Price = $0.26

So, the company’s stock price today is $0.26