A company is projected to have a free cash flow of $443 million next year, growing at a 4.6% rate until the end of year 3. After that, cash flows are expected to grow at a stable rate of 2.7%. The company's cost of capital is 10.4%. The company owes $121 million to lenders and has $9 million in cash. If it has 271 million shares outstanding, what is your estimate for its stock price? Round to one decimal place.
1. Calculation of horizon value
Year | Free cash flow | Free cash flow |
1 | $ 443.000 | |
2 | 443*(1+4.6%) | $ 463.378 |
3 | 463.3*(1+4.6%) | $ 484.693 |
3 | $ 6,464.600 | |
Current Free cash flow | $ 484.69 | |
Rate of return | 10.40% | |
Growth Rate | 2.70% | |
Horizon value at T3= | =Current Free cash flow*(1+Growth rate)/(Rate of return-Growth Rate) | |
'484.69*(1+2.7%)/(10.4%-2.7%) | ||
$ 6,464.60 |
2. Calculation of present value of future cash flows
Year | Free cash flow | Free cash flow | PV factor | Present Values |
1 | $ 443.000 | 0.905797 | $ 401.27 | |
2 | 443*(1+4.6%) | $ 463.378 | 0.820468 | $ 380.19 |
3 | 463.3*(1+4.6%) | $ 484.693 | 0.743178 | $ 360.21 |
3 | $ 6,464.600 | 0.743178 | $ 4,804.35 | |
Total PV | $ 5,946.02 |
3. Calculation of equity value and stock price
So PV of future cash flows at T3= | $ 5,946.02 | |
Add cash balance | $ 9.00 | |
Less debt balance | $ (121.00) | |
Equity value | $ 5,834.02 | |
No of shares | 271.00 | |
Stock price= | 5834.02/271 | |
Stock price= | $ 21.5 | |
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