Question

CORPORATE VALUE MODEL Assume that today is December 31, 2019, and that the following information applies to Abner Airlines:

● After-tax operating income [EBIT(1 2 T)] for 2020 is expected to be $400 million. ● The depreciation expense for 2020 is expected to be $140 million. ● The capital expenditures for 2020 are expected to be $225 million. ● No change is expected in net operating working capital. ● The free cash flow is expected to grow at a constant rate of 6% per year. ● The required return on equity is 14%. ● The WACC is 10%. ● The firm has $200 million of non-operating assets. ● The market value of the company’s debt is $3.875 billion. ● 200 million shares of stock are outstanding.

Using the corporate valuation model approach, what should be the company’s stock price today?

Answer 1

Calculation of free cash flow

Free Cash Flow = Net Income after tax + Depreciation - Capital Expenditure - Change in net working Capital
= 400 + 140 - 225 -0 = 315 million

Calculation of value of firm

Value of firm = Free Cash Flow/(WACC-Growth rate)
=315/(10%-6%)
=315/0.04
= 7,875.00 millions

Calculation of Value of Equity

Value of Equity = Firm Value + Non-operating asset - Debt
= 7,875.00 + 200 - 3,875
= 4,200 millions

Calculation of price per share

Price per share = Value of Equity/Number of share = 4,200Million/200Miilion = $21

Hence, price per share should be $21.00

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