Question

The Stetson Corp. estimates that it will have free cash flow of $20 million, $30 million and $40 million in the next three years respectively. After that, FCF will grow at 8% indefinitely. Their cost of capital is 9.4%, and they have $120 in debt, $30 million of preferred stock and $20 million in short term investments. There are 10 million shares of common stock outstanding. Estimate the price per share of common stock using the FCF valuation model.

Answer #1

WACC= | 9.40% | ||||||

Year | Previous year FCF | FCF growth rate | FCF current year | Horizon value | Total Value | Discount factor | Discounted value |

1 | 0 | 0.00% | 20 | 20 | 1.094 | 18.2815 | |

2 | 20 | 0.00% | 30 | 30 | 1.196836 | 25.06609 | |

3 | 30 | 0.00% | 40 | 3085.714 | 3125.714 | 1.309338584 | 2387.24654 |

Long term growth rate (given)= | 8.00% | Value of Enterprise = | Sum of discounted value = |
2430.59 mln |

Enterprise value = Equity value+ MV of debt+ MV of preferred stock |

- Short term investments |

2430.59 = Equity value+120+30-20 |

Equity value = 2300.59 mln |

share price = equity value/number of shares |

share price = 2300.59/10 |

share price = 230.06 |

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