Question

KJ wants to forecast a 12-month price target for Cain and Associates. He estimates the FCFs and terminal value shown in the table below. C&A's equity to total capitalization ratio is expected to hold steady at 70%. C&A has 20 million shares outstanding. Using this information and a WACC of 12.5%, what is C&A's price per share?

(in $millions)	Year 1	Year 2	Year 3
FCFs	$23	$25.8	$34
Terminal Value			$567

1. $23.14 per share

2. $462.70 per share

3. $22.70 per share

4. $16.19 per share

Answer 1

Year	FCF	[email protected]%	Disc FCF
1	$         23	0.8889	$   20.44
2	$         26	0.7901	$   20.39
3	$         34	0.7023	$   23.88
3	$       567	0.7023	$ 398.22
PV of FCF	$ 462.93

Equity to capitalization ratio = 70%

Total capitalization = $ 462.93

Therefore Equity = 462.93*70%

= $ 324.05

No of shares outstanding = 20 M

Price of the share = 324.05 / 20

= $ 16.19 per share

Option 4 has to be selected

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