Question

Suppose FCFE = $900,000 for years 1-4 and then is expected to grow at a rate of 3%. Assume ke = 18%. If there are 500,000 shares outstanding, what is the predicted price of this stock?

Answer 1

Price of stock is $ 11.22

As per discounted cash flow method, current share price is the present value of cash flows from share.
Step-1:Present value of cash flows of 4 years
Present value of cash flow	=	Annual Cash flow	*	Present value of annuity of 1
	=	$          9,00,000	*	2.690061805
	=	$ 24,21,055.62
Working:
Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
	=	(1-(1+0.18)^-4)/0.18		i	=	18%
	=	2.690061805		n	=	4
Step-2:Present value of cash flows after 4 years
Present value	=	CF4*(1+g)/(Ke-g)*DF4		Where,
	=	$ 31,87,575.25		CF4			=	$ 9,00,000
				g			=	3%
				Ke			=	18%
				DF4	=	1.18^-4	=	0.5157889
Step-3:Price of stock
Price of stock	=	Sum of present value of cash flows	/	Shares outstanding
	=	$ 56,08,630.87	/	5,00,000
	=	$                11.22
Working:
Sum of present value of cash flows	=	$ 24,21,055.62	+	$ 31,87,575.25
	=	$ 56,08,630.87