Question

The Printer Company has a historical growth in its free cash flows of 3%. However, with the addition of new plant and equipment, free cash flows are expected to grow 8% in year 1, 5% in year 2, and 4% thereafter. The firm's last free cash flow was $200,000. The firm has a required rate of return of 10%. The market value of non-operating assets is $900,000. The market value of the firm's debt is $1,500,000 and the market value of preferred stock is $500,000. There are 100,000 shares outstanding.

a) Calculate the expected value of the firm's operations.

b) What is the expected market value of the firm?

c) What is the expected market value of the firm's equity?

d) What is the expected value of the stock?

Answer 1

1.
=200000*(1.08/1.1)+200000*(1.08/1.1)*(1.05/1.1)+200000*(1.08/1.1)*(1.05/1.1)*1.04/(10%-4%)=3632727.27272727

2.
=200000*(1.08/1.1)+200000*(1.08/1.1)*(1.05/1.1)+200000*(1.08/1.1)*(1.05/1.1)*1.04/(10%-4%)+900000=4532727.27272727

3.
=200000*(1.08/1.1)+200000*(1.08/1.1)*(1.05/1.1)+200000*(1.08/1.1)*(1.05/1.1)*1.04/(10%-4%)[phone]-500000=2532727.27272727

4.
=(200000*(1.08/1.1)+200000*(1.08/1.1)*(1.05/1.1)+200000*(1.08/1.1)*(1.05/1.1)*1.04/(10%-4%)[phone]-500000)/100000=25.3272727272727