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Consider the following information: FCF1, -$12; FCF2, $22; FCF3, $33; expected growth rate of free    ...

Consider the following information: FCF1, -$12; FCF2, $22; FCF3, $33; expected growth rate of free

    cash flow, 5%; weighted average cost of capital, 9%; preferred stock, $20; notes payable, $15; marketable

    securities, $10; long-term debt, $80; common shares outstanding, 25.

a. Calculate the horizon value at the end of year 3.

b. Calculate the current value of operations.

c. Calculate the intrinsic value of common equity.

d. Calculate the intrinsic stock price

e. Suppose the current price of the stock is $18. Should it be purchased now?

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Answer #1

(e) As current market price of stock is less than intrinsic price of stock .Therefore,stock is underpriced and hence this stock should be purchased now.

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