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Hallicut inc. project that over the next three years, it will generate cash flows of $22...

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?

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Answer #1

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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