Question

4. Corporate valuation model Flying Cow Aviation Inc.'s free cash flows (FCFs) are expected to grow at a constant long-term growth rate (gl) of 16% per year into the future. Next year, the company expects to generate a free cash flow of $7,000,000. The market value of Flying Cow's outstanding debt and preferred stock is $45,000,000 and $25,000,000, respectively. Flying Cow has 1,500,000 shares of common stock outstanding, and its weighted average cost of capital (WACC) is 23%. Given the preceding information, complete the adjacent table (rounding each value to the nearest whole dollar), and assuming that the firm has not had any nonoperating assets in its balance sheet. Term Value Value of Operations Value of Firm's Common Equity Value of Common Stock (per share) $

Answer 1

Total firm value FCF1/(r-g) Here, Free cash flows (FCF1) $ 7,000,000 Required return (r) Growth rate (g) 23% 16% Value of operations $100,000,000 Less: Debt Preferred stock $ 45,000,000 $ 25,000,000 Value of common equity Number of shares issued $ 30,000,000 1500000 Value of common stock $ 20 Correct option is "4th option" II

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