Question

Year : 1 2 3 4 5
Free Cash Flow: $23 million $27 million $28 million $31 million $34 million

XYZ Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 3% per year. If the weighted average cost of capital is 10% and XYZ has cash of $11 million, debt of $43 million, and 79 million shares outstanding, what is General Industries' expected current share price?

Round to the nearest one-hundredth.

Answer 1

FCF 5 = 34 * (1+0.03) = 35.02

According to dividend-discount model,

P0 = D1/(R-G)

P0 = Current Value

D1 - FCF at t =1

R - Required rate

G - Growth rate

P5 = FCF 6/(R-g) = 35.02/(0.1-0.03) = 500.29 million

P0 = 23/(1+0.1)^1 + 27/(1+0.1)^2 + 28/(1+0.1)^3 + 31/(1+0.1)^4 + 34/(1+0.1)^5 + 500.29/(1+0.1)^5 = $417.18 million

Entrprise value = 417.18 + 11 = $428.18 million

Total value of equity = 428.18 - 43 = $385.18 million

Share price = Total equity/no. of shares = 385.18/79 = $4.88 per share

Enterprise value = $677.15 million

b.

Total equity = Enterprise value - debt = 677.15 - 306 = $371.15

Share price = Total equity/No. of shares = 371.15/40 = $9.28 per share