Question

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 risk-free 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?

Answer #1

**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**

Feel free to ask in case of any query relating to this question

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 risk-free 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?

Question 7
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