Hallicut inc. project that over the next three years, it will generate cash flows of $22 thousand in year one, $29 thousand in year two, and $37 thousand in year three. The terminal (horizon) value of free cash flows in year three is expected to be $138 thousand. The corporation has 24 thousand shares of common stock outstanding and a weighted average cost of capital of 8.96%. If Hallicut must pay $88 thousand to its debtholders, based on the FCFF method, what is the intrinsic value of a share of common stock?
Value of firm = PV of Cash flows from it.
Year | FCF | PVF @8.96% | PV of FCFs |
1 | $ 22,000.00 | 0.9178 | $ 20,190.90 |
2 | $ 29,000.00 | 0.8423 | $ 24,426.64 |
3 | $ 37,000.00 | 0.7730 | $ 28,602.27 |
3 | $ 138,000.00 | 0.7730 | $ 106,678.72 |
Value of Firm | $ 179,898.53 |
Value of Equity = Value of firm - Debt
= $ 179898.53 - $ 88000
= $ 91898.53
Share Price = Value of Equity / No. of shares
= $ 91898.53 / 24000
= $ 3.83
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