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 $600 million.
The depreciation expense for 2020 is expected to be $80 million.
The capital expenditures for 2020 are expected to be $425 million.
No change is expected in net operating working capital.
The free cash flow is expected to grow at a constant rate of 7% per year.
The required return on equity is 16%.
The WACC is 11%.
The firm has $204 million of non-operating assets.
The market value of the company's debt is $3.038 billion.
340 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

Expected FCF for 2020 = EBIT(1 - T) + Depreciation Expense - Capital Expenditures - Change in NOWC
Expected FCF for 2020 = $600 million + $80 million - $425 million - $0
Expected FCF for 2020 = $255 million

Growth Rate = 7%
WACC = 11%

Value of Firm = Expected FCF for 2020 / (WACC - Growth Rate)
Value of Firm = $255 million / (0.11 - 0.07)
Value of Firm = $6,375 million

Value of Equity = Value of Firm - Value of Debt + Value of Non-Operating Assets
Value of Equity = $6,375 million - $3,038 million + $204 million
Value of Equity = $3,541 million

Price per share = Value of Equity / Number of shares outstanding
Price per share = $3,541 million / 340 million
Price per share = $10.41