Question

Estimate the current stock price (P₀) using the Free Cash Flow method with the following data:

Bonds Yield to Maturity: 6%
Tax Rate: 30%
WACC: 5.576%
beta: 0.75
T-Bill Rate: 4%
S&P 500 Returns: 10%
Total Capital: $1,000,000
Equity: $320,000
FCF1: $250,000
FCF2: $500,000
FCF3: $750,000
Constant Growth After Year-3: 2.5%
Shares Outstanding: 1,500,000

Question 1 options:

	$9.42
	$10.91
	$14.59
	$8.17
	$10.19
	$19.42
	$18.17

Answer 1

Debt value=Total Capital-equity=$1000000-$320,000=$680,000

Given, FCF1: $250,000
FCF2: $500,000
FCF3: $750,000

FCF4=FCF3*(1+2.5%)=750,000*1.025=$768,750

Terminal value at Year3=FCF4/(WACC-growth rate)=$768,750/(5.576%-2.5%)=$24,991,873.56

Value of the firm=(FCF1/(1+WACC))+(FCF2/(1+WACC)^2)+((FCF3+Terminal value)/(1+WACC)^3)

=(250000/1.05576)+(500000/1.05576^2)+(25,741,872.56/1.05576^3)

=$22,560,197.78

Value of the Common stock=Value of the firm-Debt value=$22,560,197.78-$680,000=$21,880,197.78

Value of the current stock price=Value of the equity/Outstanding shares=$21,880,197.78/1500000=$14.59

Option C is correct