Question

Year	1	2	3	4	times times times•••
FCF	1313	1515	1616	1717	Grow by 5 %5% per year

a. Covan has

88

million shares? outstanding,

$22

million in excess? cash, and it has no debt. If its cost of capital is

12 %12% ,

what should be its stock? price?

b. Covan reinvests all its FCF and has no plans to add debt or change its cash holdings? (it does not invest its cash? holdings). If you plan to sell Covan at the beginning of year? 2, what is its expected? price?

c. Assume you bought Covan stock at the beginning of year 1. What is your expected return from holding Covan stock until year? 2?

Answer 1

a. Value of a company, at t=0 = Present value of cash flows of the company

V0 = = 207.81 millions

Value of equity = V0 + Cash - Debt = 207.81+22-0 = $229.81 mn

Value oer share = Value of equity/ number of shares = 229.81/88 = $2.61 per share

b.

Value of company at beginning of year 2, = PV of remaining future cash flows

V2, beg = = $219.75mn

Value of equity = 219.75+22-0 = 241.75 mn

Value per share = 241.75/88 = $2.75 per share

c. Holding period return = (Closing price - purchase price)/purchase price = (2.75-2.61)/2.61 = 5.36%

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