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The Stetson Corp. estimates that it will have free cash flow of $20 million, $30 million...

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.

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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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