Question

QUESTION 27 You must estimate the intrinsic value of Lowell Technologies' stock. The end-of-year free cash flow (FCF1) is expected to be $30 million, and it is expected to grow at a constant rate of 5.0% a year thereafter. The company's WACC is 8.0%, it has $200 million of long-term debt, and there are 20.0 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock? $34.00 0 $36.00 0 $38.00 0 $40.00 0 $42.00

Answer 1

1)

FCF1 = 30

FCF2 = 30 (1 + 5%) = 31.5

Value at year 1 = FCF2 / required rate - growth rate

Value at year 1 = 31.5 / 0.08 - 0.05

Value at year 1 = 31.5 / 0.03

Value at year 1 = 1,050

Value today = 30 / (1 + 0.08)1 + 1,050 / (1 + 0.08)1

Value today = $1,000 million

Intrinsic value = (1,000 - 200) / 20

Intrinsic value = $40.00

2)

Total investment = 200,000 + 300,000 + 500,000 + 1,000,000 = 2,000,000

Weighted average beta = (200,000 / 2,000,000)*2 + (300,000 / 2,000,000)*(-0.6) + (500,000 / 2,000,000)*1.2 + (1,000,000 / 2,000,000)*1

Weighted average beta = 0.2 - 0.09 + 0.3 + 0.5

Weighted average beta = 0.91

Required return = Risk free rate + beta(market return - risk free rate)

Required return = 6% + 0.91(13% - 6%)

Required return = 6% + 6.37%

Required return = 12.37%