Question

Year                          1    2          3               4                 5
Free Cash Flow $23 million $25 million $29 million $32 million $34 million

XYZ Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 2% per year. If the weighted average cost of capital is 8% and XYZ has cash of $20 million, debt of $48 million, and 61 million shares outstanding, what is General Industries' expected current share price?

Round to the nearest one-hundredth.

Answer 1

The price is computed as shown below:

= FCF in year 1 / (1 + WACC) + FCF in year 2 / (1 + WACC)² + FCF in year 3 / (1 + WACC)³ + FCF in year 4 / (1 + WACC)⁴ + FCF in year 5 / (1 + WACC)⁵ + 1 / (1 + WACC)⁵ x [ (FCF in year 5 (1 + growth rate) / (WACC - growth rate) ]

= $ 23 million / 1.08 + $ 25 million / 1.08² + $ 29 million / 1.08³ + $ 32 million / 1.08⁴ + $ 34 million / 1.08⁵ + 1 / 1.08⁵ x [ ($ 34 million x 1.02) / (0.08 - 0.02) ]

= $ 23 million / 1.08 + $ 25 million / 1.08² + $ 29 million / 1.08³ + $ 32 million / 1.08⁴ + $ 612 million / 1.08⁵

= $ 505.7887737 million

So, the per share value will be as follows:

= ($ 505.7887737 million - value of debt + cash) / Number of shares

= ($ 505.7887737 million - $ 48 million + $ 20 million) / 61 million shares

= $ 7.83 Approximately

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