Question

A company is projected to generate free cash flows of $800 million per year for the next 3 years (FCFF1, FCFF2 and FCFF3). Thereafter, the cash flows are expected to grow at a 1.5% rate in perpetuity. The company's cost of capital is 12.0%. The company owes $100 million to lenders and has $90 million in cash. If it has 150 million shares outstanding, what is your estimate for its stock price? Round to one decimal place.{Hint: Draw the timeline and figure out where the stable growth phase begins (end of year 3, beginning of year 4). Compute TV for that point as TV3 = FCFF4 / (WACC-g), where FCFF4 = FCFF3x(1+g). Then discount everything (FCFF1, FCFF2, FCFF3 and TV3) back to time zero. Then walk the bridge from EV to stock price. }

The answer may not be 49.4!!!!

Answer 1