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Right now you are investigating the possibility of making an equity investment in Wood corp, a...

Right now you are investigating the possibility of making an equity investment in Wood corp, a firm that specializes in producing furniture with a modern twist. Your research has revealed the following information:

Wood corp has $8 million in excess cash and $1.5 million in debt.

The company is expected to have free cash flow of $26 million in 2020 and $30 million in 2021.

Beyond 2021, free cash flow is expected to grow at a constant rate of 2% per year forever.

Wood Corp weighted average cost of capital (WACC) is 11% and it has 8 million shares outstanding.

(5 points) What should be the price of one share of Wood Corp stock?

a.

$37.05
b.

$41.28
c.

$47.64
d.

$48.47
e.

$39.65
f.

$37.56
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Answer #1

Answer is $41.28

FCF 2020 = $26 million
FCF 2021 = $30 million

Growth Rate, g = 2.00%
WACC = 11.00%

FCF 2022 = FCF 2021 * (1 + g)
FCF 2022 = $30 million * 1.02
FCF 2022 = $30.60 million

Horizon Value = FCF 2022 / (WACC - g)
Horizon Value = $30.60 million / (0.11 - 0.02)
Horizon Value = $340 million

Value of Firm = $26 million / 1.11 + $30 million / 1.11^2 + $340 million / 1.11^2
Value of Firm = $323.72 million

Value of Equity = Value of Firm - Value of Debt + Value of Excess Cash
Value of Equity = $323.72 million - $1.50 million + $8.00 million
Value of Equity = $330.22 million

Price per share = Value of Equity / Number of Shares Outstanding
Price per share = $330.22 million / 8.00 million
Price per share = $41.28

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