Question

A company 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?

Answer 1

Solution :-

Price per share of stock = [ (FCF Next Year / ( WACC - g ) ] - Debt + Excess cash ) / Shares Outstanding

FCF Next Year = $200 million

WACC = 12%

Growth Rate (g) = 2%

Debt = $500 million

Excess Reserve = $15 million

Shares Outstanding = 20 million

Now Price per share of stock = { [ $200 million / ( 0.12 - 0.02 ) ] - $500 million + $15 million } / 20 million

Price per share of stock = [ $2,000 million - $500 million - $15 million ] / 20 million

= $1,515 million / 20 million

= $75.75

Therefore Price of share = $75.75

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