Question

Portage Bay Enterprises has $ 4 million in excess​ cash, no​ debt, and is expected to have free cash flow of $ 9 million next year. Its FCF is then expected to grow at a rate of 4 % per year forever. If Portage​ Bay's equity cost of capital is  13% and it has 4 million shares​ outstanding, what should be the price of Portage Bay​ stock?

a. The price of Portage​ Bay's stock is ​$_____ per share. 

Answer 1

Given about Portage Bay Enterprices,

Cash = $4 million

Free cash flow next year FCF1 = $9 million

FCF growth rate g = 4%

equity cost of capital Ke = 13%

So, Enterprise value can be calculated using constant growth model

Enterprise value EV = FCF1/(Ke-g) = 9/(0.13-0.04) = $100 million

Number of shares outstanding = 4 million

So, Price per share of stock = (EV + cash)/number of shares outstanding

So, stock price = (100 + 4)/4 = $26 per share

The price of Portage​ Bay's stock is ​$26 per share.