Question

Use the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow (FCF₁) is expected to be $65.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the future, the company has $200 million of long-term debt and preferred stock, and it has 25 million shares of common stock outstanding. Assume the firm has zero non-operating assets. What is the firm's estimated intrinsic value per share of common stock? Do not round intermediate calculations.

		a. $52.00
		b. $44.00
		c. $58.80
		d. $40.00
		e. $38.60

Answer 1

The firm's value per share is computed as shown below:

= FCF1 / ( 1 + WACC) + 1 / (1 + WACC) x [ ( FCF1 (1 + growth rate) / ( WACC - growth rate) ]

= $ 65 million / 1.10 + 1 / 1.10 x [ ($ 65 million x 1.05) / (0.10 - 0.05) ]

= $ 65 million / 1.10 + $ 1,365 million / 1.10

= $ 1,300 million

So, the value per share will be computed as follows:

= ($ 1,300 million - long term debt and preferred stock) / Number of shares

= ($ 1,300 million - $ 200 million) / 25 million

= $ 1,100 million / 25 millon

= $ 44.00

So, the correct answer is option b.

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