Question

QUESTION 10 Wall Inc. forecasts that it will have the free cash flows (in millions) shown below. Its weighted average cost of capital is 14%. The free cash flows are expected to continue growing at the same rate after Year 4 as from Year 3 to Year 4. It currently has 30% debt and 70% equity and 1.5 million shares outstanding. What is your estimate of the stock's current value? 3 Year FCFS $20.00 $48.00 $54.00 4 $59.40

Answer 1

Solution:

We can calculate the discounted cash flow to find the share price.

All the calculation are done in the below diagram

Share price is $171.43.

в Terminal Value T AWN Year FCF Growth 1 -20 2 48 (3.40) 3 54 0.13 4 59. 4 4 66.71 =F3*(1+F4)/0.14 0.10 (17.54)| 36.93 36.45 35.17 =C3/1.14-C2 |=D3/1.149D2 =E3/1.14^E2|=F3/1.144F2| 276.33 =H3/1.14^H2 Discounted CF Formula Total Cash Flow to Firm 367.34 =C6+D6+E6+F6+H6 BBC Equity value 257.14 =C8*0.7 70% of total cash flow to firm Share Price 171.43 |=C10/1.5 Equity value / Number of shares outstanding