Question

Assume that today is December 31, 2019, and that the following information applies to Abner Airlines: • After-tax operating income (EBIT(1 - T)] for 2020 is expected to be $500 million • The depreciation expense for 2020 is expected to be $170 million. • The capital expenditures for 2020 are expected to be $275 million. • No change is expected in net operating working capital. • The free cash flow is expected to grow at a constant rate of 6% per year. • The required return on equity is 15%. • The WACC is 10%. • The firm has $206 million of non-operating assets. • The market value of the company's debt is $4.073 billion. • 240 million shares of stock are outstanding. Using the corporate valuation model approach, what should be the company's stock price today? Do not round intermediate calculations. Round you answer to the nearest cent.

Answer 1

EBIT(1-t) = $500

Add: Depreciation Expense(non-cash) = $170 million

Less: Net Capital expenditure = $275

Change in Net operating working capital = $0 million

Free cash flow = $395 million

Value of firm is equal to the present value of all future free cash flows

= 395/(10%-6%)

= $9,875 million

Add: Non-operating assets = 206

Less: Value of Debt = $4,073 million

Value of Common Equity = $6,008 million

Number of shares = 240 million

Intrinsic value per share = $25.03