Question

1. Year                            1                      2                      3                      4

   Free Cash Flow $24 million      $36 million      $44 million      $48 million

   Conundrum Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 4% per year. If the weighted average cost of capital is 15% and Conundrum has cash of $80 million, debt of $60 million, and 30 million shares outstanding, what is Conundrum's expected current share price?   

   		$18.06
   		$17.62
   		$12.80
   		$13.71

Answer 1

The price per share is computed as shown below:

= FCF1 / (1 + WACC) + FCF 2 / (1 + WACC)2 + FCF3 / (1 + WACC)3 + FCF4 / (1 + WACC)4 + 1 / (1 + WACC)4 [ ( FCF in year 4 (1 + growth rate) / (WACC - growth rate) ]

= $ 24 million / 1.15 + $ 36 million / 1.152 + $ 44 million / 1.153 + $ 48 million / 1.154 + 1 / 1.154 [ ( $ 48 million x 1.04) / ( 0.15 - 0.04) ]

= $ 24 million / 1.15 + $ 36 million / 1.152 + $ 44 million / 1.153 + $ 48 million / 1.154 + $ 453.8181818 million / 1.154

= $ 363.9376256 million

So, the value per share will be computed as follows:

= ($ 363.9376256 million + cash - debt) / Number of shares

= ($ 363.9376256 million + $ 80 million - $ 60 million) / 30 million shares

= $ 12.80 Approximately

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