Question

Assume that today is December 31, 2019, and that the following information applies to Abner Airlines:

After-tax operating income [EBIT(1 - T)] for 2020 is expected to be $450 million.
The depreciation expense for 2020 is expected to be $190 million.
The capital expenditures for 2020 are expected to be $225 million.
No change is expected in net operating working capital.
The free cash flow is expected to grow at a constant rate of 6% per year.
The required return on equity is 15%.
The WACC is 12%.
The firm has $206 million of non-operating assets.
The market value of the company's debt is $3.304 billion.
130 million shares of stock are outstanding.

Using the corporate valuation model approach, what should be the company's stock price today?

Answer 1

Free cash flow to the firm = EBIT*(1-t) + Depreciation - Capex - Change in net working capital

FCF to the firm in 2020 = 450 + 190 - 225 =$ 415 M

Growth till perpetuity,g = 6% per year

WACC, k = 12%

Value of the firm, EV = FCF 2020 / (k-g) = 415 /( 12% - 6%) = $ 6916.67= $ 6.916 B

MV of Debt = $ 3.304 B

Non operating assets = $ 0.206 B

MV of Equity = EV - MV of Debt - Non-operating assets = 6.916 - 3.304 - 0.206 = $ 3.406 B

Number of shares o/s = 130 M

Price per share = 3.406 B/ 130 M = $ 26.2