Question

A company is expected to have free cash flows of $1.75 million next year. The weighted...

A company is expected to have free cash flows of $1.75 million next year. The weighted average

cost of capital is WACC= 12% and the expected constant growth rate is g=6%. The company has

$1.5 million in short-term investments, $2 million in debt, and 1.5 million shares. What is the

stock’s current intrinsic stock price?

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Answer #1

A company is expected to have free cash flows of $1.75 million next year. The weighted average

cost of capital is WACC= 12% and the expected constant growth rate is g=6%. The company has

$1.5 million in short-term investments, $2 million in debt, and 1.5 million shares. What is the

stock’s current intrinsic stock price?

All financials below are in $ mn. Number of shares are in mn. And share price is in $.

Expected free cash flow, C1 = 1.75

r = 12%, g = 6%

Value of the operations, Vops = C1 / (r - g) = 1.75 / (12% - 6%) =  29.17

Value of the firm = Vops + Non operating assets (short term investments) = 29.17 + 1.5 = 30.67

Value of equity, VE = Value of the firm - value of the debt = 30.67 - 2.0 = 28.67

Number of shares outstanding, N = 1.5

The stock’s current intrinsic stock price = VE / N = 28.67 / 1.5 = $ 19.11 / share

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