Question

Noe Technologies’ stock current free cash flows is expected to be $25.00 million, and it is expected to grow at a constant rate of 5.0% a year thereafter. The company’s WACC is 10.0%, it has $125.0 million of long-term debt and $25.0 million of marketable securities, and there are 10.0 million shares of common stock outstanding. What is the firm's intrinsic value per share of common stock?

Answer 1

CF0 = $25 million

CF1 = $25 million *1.05 =$26.25 million

From Gordon's Constant Growth model

Value of Firm = CF1/(r-g)

where r is the required rate on firm's cashflows i.e. WACC

and g is the constant growth rate of cashflows

So, Value of firm = $26.25 million (0.10-0.05) = $525 million

As Value of Firm = Value of Debt+ Value of Equity- Value of marketable securities

Value of Equity = Value of Firm-Value of Debt+Value of marketable securities

=$525 million -$125 million +$25 million = $425 million

Intrinsic value per share = Value of equity/no. of shares = $425 million/10 million = $42.50 per share

(NOTE - Some authors do not account for Marketable securities value, in that case,

Value of equity = Value of Firm-Value of Debt = 525 million -$125 million =$400 million and

Intrinsic value per share = Value of equity/no. of shares = $400 million/10 million = $40.00 per share)