Question

According to the value-based management model, what is the stock price per share given the following...

According to the value-based management model, what is the stock price per share given the following data?

Year

1

Revenue

725.00

Fixed costs

100.00

Variable costs

300.00

Additional investment in NWC

3.00

Additional investment in operating long-term assets

80.00

Depreciation

75.00

Tax rate

0.40

The free cash flow is expected to grow at 8% from year 1 to year 5 and 6% after year 5 to infinity. WACCcomp =15%.

Market value of the firm:

Price per share

Number of shares

Market value

Long-term debt

700.00

Preferred stock

7.00

10

70.00

Common stock, equity

15.00

100

1,500.00

Total

2,270.00

Market value of non-operating short-term assets=50

Market value of non-operating long-term assets=80

Select one:

a. $10.38

b. $21.97

c. $14.22

d. $7.54

e. $18.54

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Homework Answers

Answer #1

EBIT = 650 -90-220 -75 = 265

Free csh flow = EBIT*(1- tax rate) + Depreciation - Additional WC - capital expenditure

Free cash flow(FCF1) = 265*(1-0.4) +75 -3 -80 = 151

FCF2 = 151*1.08 = 163.08

FCF3 = 163.08*1.08 = 176.1264

FCF4 = 176.1264 *1.08 = 190.2165

FCF5 = 190.2165 *1.08 = 205.4338

FCF6 = 205.4338*1.03 = 211.5968

Horizon value at the end of year 5 = FCF6/(r-g) = 211.5968/(0.15-0.03) = $1,763.31

Current Value = 151/1.15 + 163.08/1.15^2 + 176.1264/1.15^3 +190.2165/1.15^4 + 205.4338/1.15^5 + 1763.31/1.15^5 = 1457.993

Current price per share = (1457.993 -700)/100 = 7.54 (option D)

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