Question 7
You are valuing a company that generated free cash flow of $10 million last year, which is expected to grow at a stable 3.0% rate in perpetuity thereafter. The company has no debt and $8 million in cash. The market risk premium is 8.4%, the riskfree rate is 2% and the firm’s beta is 1.4. There are 50 million shares outstanding. How much is each share worth according to your valuation analysis?
1. 
$2.75 

2. 
$2.02 

3. 
$2.07 

4. 
$2.67 

5. 
$2.31 
The value is computed as shown below:
Required rate of return is computed as shown below:
= risk free rate + Beta x market risk premium
= 0.02 + 1.4 x 0.084
= 13.76% or 0.1376
The value of the firm is computed as follows:
= [ [ FCF last year (1 + growth rate) / [ (required rate of return  growth rate) ] ] + cash ] / Number of shares
= [ [ $ 10 million x 1.03) / [ (0.1376  0.03) ] + $ 8 million ] / 50 million shares
= $ 103.7249071 / 50 million shares
= $ 2.07 Approximately
So, the correct answer is option 3.
Feel free to ask in case of any query relating to this question
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