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 $700 million. The depreciation expense for 2020 is expected to be $70 million. The capital expenditures for 2020 are expected to be $300 million. No change is expected in net operating working capital. The free cash flow is expected to grow at a constant rate of 4% per year. The required return on equity is 15%. The WACC is 10%. The firm has $200 million of non-operating assets. The market value of the company's debt is $4.962 billion. 190 million shares of stock are outstanding.

Using the corporate valuation model approach, what should be the company's stock price today? Do not round intermediate calculations. Round your answer to the nearest cent. $???

Answer 1

Answers:

$16.165

Explanation:

Free Cash Flow (FCF) = After-tax operating income + depreciation - capita Expenditure

= 700 + 70 -300

= 470 million

.

Value of operations (Vo) = FCF/(WACC - Growth Rate)

= 470 Million/(10%-4%)

= 7833.3333 million

.

Firm value = value of operations + non-operating assets

= 7833.3333 + 200

= 8033.3333 million

.

Equity value = Firm value - debt

= 8033.3333 - 4962

= 3071.3333million

.

Price per share = equity value/number of shares outstanding

= 3071.3333/190

= $16.165