Question

Suppose General Foods has decided to enter the soda business and they will require additional capital. Management will finance the project by borrowing $100 million and by haulting dividend payments. Management forecasts that free cash flow for the next two years will be -$50, and $35 million. After year 2 the cash flows will grow at a rate of 4%. The current WACC for General foods is 10%. What is the firms price per share given there are 50 Million Shares outstanding?

Answer 1

Free cash flow for year 1 to 2 has been provided

g = Growth rate of FCF beyond year 2 = 4% per year forever

WACC = 10%

Calculating the Enterprise Value ($ millions):-

EV = -45.455 + 28.926 + 501.377

EV = $484.85 millions

- Enterprise Value = Market Value of equity + Market Value of Debt

$484.85 millions = Market Value of equity + $100 million

Market Value of equity= $384.85 million

- Intrinsic Price per share = Market Value of equity/No of shares outstanding

= $384.85 million/50 million

Intrinsic Price per share = $7.70

So, the firms price per share is $7.70

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