Question

# Use the following information and a Free Cash Flow to the Firm model to calculate the...

1. Use the following information and a Free Cash Flow to the Firm model to calculate the stock price for Andrews, Inc. Show your work.

The free cash flow to the firm last year was 900.   The free cash flow is expected to grow at a rate of 10 percent annually for the next two years and remain the same thereafter.

 CAPM Equity Return 0.130 WACC 0.065 Cash & Marketable Sec. 580 Market Value of Debt 12,000 Book Value of Debt 13,000 Shares Outstanding 1,500

1. Value of the company = Year 1 FCF / (1 + WACC) + (Year 2 FCF / WACC) / (1 + WACC)

Value of the company = 900*1.1 / 1.065 + (900*1.1*1.1/0.065) / 1.065

Value of the company = 929.58 + \$15731.31

Value of the company = \$16660.89

2. Value of equity = Value of company + cash - Market value of debt

Value of equity = \$16660.89 + 580 - 12000

Value of equity = \$5240.89

3. Share price = Value of equity / shares o/s = \$5240.89 / 1500 = \$3.49 per share

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