Question

A company is projected to generate free cash flows of $629 million per year for the next 3 years (FCFF1, FCFF2 and FCFF3). Thereafter, the cash flows are expected to grow at a 2.8% rate in perpetuity. The company's cost of capital is 7.7%. The company owes $186 million to lenders and has $56 million in cash. If it has 193 million shares outstanding, what is your estimate for its stock price? Round to one decimal place. Numeric Answer: 58.6 You are incorrect 58.6

Answer 1

Enterprise Value= Sum of present values of Free Cash Flows (FCFs)

Given, FCFs for next 3 years (FCF1, FCF2 and FCF3)= $629 Million each

Growth rate after 3 years (g)= 2.8% in perpetuity.

Cost of capital or Discount rate (r) = 7.7%

Therefore, enterprise value (EV) = FCF1/(1+r) + FCF2/(1+r)^2 + FCF3/(1+r)^3 + [FCF4/(r-g)]/(1+r)^3

FCF4= FCF3*(1+g) = $629 Million*(1+2.8%) = $646.612 Million

FCF4/(7.7%-2.8%) = $646.612 Million/(7.7%-2.8%) = $13,196.163265 Million

Therefore, EV= $629 Million/(1+7.7%) + $629 Million/(1+7.7%)^2 + $629 Million/(1+7.7%)^3 +$13,196.163265 Million/(1+7.7%)^3

=$584.02971 Million + $542.27457 Million + $503.50471 Million + $10,563.3233 Million

=$12,193.1322 Million.

Enterprise value (EV)= Market Capitalization + Debt – Cash

Therefore, Market Capitalization= EV - Debt + Cash

Given, Debt= $186 Million and Cash= $56 Million

Therefore,

Market capitalization=$12,193.1322 Million- $186 Million + $56 Million= $12,063.1322 Million

Number of shares outstanding= 193 Million

Therefore, Share price= Market Capitalization/Number of shares

= $12,063.1322 Million/193 Million = $62.5