Question

1. PA Film Corporation’s last free cash flow was $1.55 million. The free cash flow growth rate is expected to be constant at 1.5% for 2 years, after which free cash flows are expected to grow at a rate of 8.0% forever. The firm's weighted average cost of capital (WACC) is 12.0%. It has $2 million in short-term debt and $14 million in debt and 1 million shares outstanding. What is the best estimate of the intrinsic stock price? a. $28.48 b. $26.16 c. $27.30 d. $29.70 e. $25.05

Answer #1

**The price is computed as shown below:**

**= FCF in year 1 / (1 + WACC) ^{1} + FCF in year 1
/ (1 + WACC)^{1} + 1 / (1 + WACC)^{2} x [ (FCF in
year 2 x (1 + growth rate) / (WACC - growth rate) ]**

= ($ 1.55 million x 1.015) / 1.12 + ($ 1.55 million x
1.015^{2}) / 1.12^{2} + 1 / 1.12^{2} x [ ($
1.55 million x 1.015^{2} x 1.08) / (0.12 - 0.08) ]

= $ 1.57325 million / 1.12 + $ 1.59684875 million /
1.12^{2} + $ 43.11491625 million / 1.12^{2}

= $ 1.57325 million / 1.12 + $ 44.711765 million /
1.12^{2}

**= $ 37.04863281 million**

**So, the value per share will be as follows:**

**= ($ 37.04863281 million + short term debt - debt) /
Number of shares**

= ($ 37.04863281 million + $ 2 million - $ 14 million) / 1 million

**= $ 25.05 Approximately**

Feel free to ask in case of any query relating to this question

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