Question

River Enterprises has $491 million in debt and 20 million shares of equity outstanding. Its excess cash reserves are $14 million. They are expected to generate $207 million in free cash flows next year with a growth rate of 2% per year in perpetuity River Enterprises' cost of equity capital is 125. After analyzing the company, you believe that the growth Tre should be 3's Instead of 2% How much higher (in dollars) would the price per share be if you are right? the growth rate is 2%, the price per share is (Round to the nearest cent) if the growth rate is 3% the price per share is (Round to the nearest cont) you are right and the growth rate is 3%, the price per share would be highet. (Round to the nearest cont.) Ban

Answer 1

Enterprise value = Present value of free cash flows

At 2%

Value = 207 million/(12%-2%) = $2070 million

Price per share = (2070-491+14)/20 = $79.65

At 3%

Enterprise value = 207/(12%-3%) = $2300 million

Price per share = (2300-491+14)/20 = 91.15

The price would be $11.5 higher