Question

Assume that today is December 31, 2018, and that the following information applies to Abner Airlines:

After-tax operating income [EBIT(1 - T)] for 2019 is expected to be $500 million.
The depreciation expense for 2019 is expected to be $180 million.
The capital expenditures for 2019 are expected to be $400 million.
No change is expected in net operating working capital.
The free cash flow is expected to grow at a constant rate of 6% per year.
The required return on equity is 15%.
The WACC is 10%.
The firm has $200 million of non-operating assets.
The market value of the company's debt is $3.096 billion.
340 million shares of stock are outstanding.

Using the corporate valuation model approach, what should be the company's stock price today? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Free cash flow:

Free cash flow = Net operating profit after tax (NOPAT) + Depreciation expenses - capital expenditure - changes in Net working capital

= $500 million + $180 million - $400 million - 0

= $280 million

Firm's Total value:

Total firm value = Free cash flow / (Weighted average cost of capital - Growth rate)

= $280 million / (0.10 - 0.06)

= $280 million / 0.04

= $7,000 million

Value of common equity

Value of common equity = Total firm value + value of non-operating assets - Market value of debt

= $7,000 million + $200 million - $3,096 million

= $4,104 million

Stock price today :

Stick price today = Value of common equity / Number of shares of common stock outstanding

= $4,104 million / $340 million

= $12.07 per share

Today's stock price = $12.07 per share