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Creative Enterprise has $500 million in debt and 20 million shares of equity outstanding.  Its excess cash...

Creative Enterprise has $500 million in debt and 20 million shares of equity outstanding.  Its excess cash reserves are $15 million.  They are expected to generate $200 million in free cash flows next year with a growth rate of 2% per year in perpetuity.  Creative Enterprise’s cost of equity capital is 12%.  How much would the price per share of stock be?

(Round up your answer to the nearest two decimal points)

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Answer #1

Value of a firm is present value of the future free cash flows.

Here, future free cash flows are in form of a growing perpetuity, whose PV can be calculated as:

Firm Value = FCF next year / [r - g]

PV of free cashflows = $200 million/(12%-2%)

PV of Free Cash Flows = $ 2000 million

Add: Cash = $15 million

less: Debt = $500 million

therefore, Value of common equity = 2000 + 15 -500 = $ 1515 million

Number of Shares issued = 20 million

Share price @ 2% growth = Value of common equity/ Number of Shares issued = 1515/20

Share price @ 2% growth = 75.75

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