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A company is projected to generate free cash flows of $357 million next year, growing at a 6% rate until the end of year 3. After that, cash flows are expected to grow at a stable rate of 2.4% in perpetuity. The company's cost of capital is 9.1%. The company owes $96 million to lenders and has $14 million in cash. If the company has 207 million shares outstanding, what is your estimate for its stock price

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Tundexi

Answer:

$27.02

Explanation:

Year a   Cash flow b   Discount factor (c = 1.091^-a)   Present Value d=b*c

1                $357.00                   0.9165903                          $327.22

2               $378.42                    0.8401377                           $317.92

3               $401.13                      0.7700621                          $308.89

Total                                                                                       $954.04

Present value of after year 3 cash flows:

Present value = CF3*(1+g)/(Ke-g)*DF3; where CF3 =$401.13, g = 2.40%, Ke = 9.10%, DF3 = 0.770062,

Present value = $4,720.97

Present value of all cash flows:

Present value of cash flows = $954.04 + $4,720.97 + $14.00

Present value of cash flows = $5,689

Calculation of value per share:    

Value of firm =            $5,689.00

Less: Value of debt = $96.00

Value of equity           $5,593.00      

/ No. of shares                 207      

Value per share          $27.02    

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