Question

Long Island Power and Light's free cash flow next year will be $100 million and it...

Long Island Power and Light's free cash flow next year will be $100 million and it is widely expected to grow at a 5 percent annual rate indefinitely. The company's weighted average cost of capital is 10 percent, the market value of its liabilities is $1 billion, and it has 20 million shares outstanding.

                                                                       

            a. Estimate the price per share of Long Island’s common stock.                                                                

            b. A private equity firm believes that by selling the company’s 767 airplane, increasing the work day to eight hours, and instituting other cost savings, it can increase Long Island’s free cash flow next year to $110 million and can add a full percentage point to Long Island’s growth rate without affecting its cost of capital. What is the maximum price per share the private equity firm can justify bidding for control of Long Island?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

a.

value of the firm

=D1/(ke-g)

=100/(10%-5%)

=2000 million

Estimate the price per share of Long Island’s common stock

=(value of the firm-value of its liabilities)/shares outstanding

=(2000-1000)/20

=50

b.

value of the firm after cost savings and higher growth rate

=D1/(ke-g)

=110/(10%-6%)

=2750 million

Estimate the price per share of Long Island’s common stock

=(value of the firm-value of its liabilities)/shares outstanding

=(2750-1000)/20

=87.50

The above is answer..

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Carmax Inc. has generates annual free cash flow of $2,096 million. The firm current has $1,823...
Carmax Inc. has generates annual free cash flow of $2,096 million. The firm current has $1,823 million in long and short-term debt, $259 million in marketable securities, and the current market value of preferred stock is $767 million. Carmax expects their cash flow to grow 25% and 10% during the next two years. The fi rm then anticipates a constant FCF growth rate of 9%. If the fi rm has a WACC of 18% and 364 million shares outstanding, what...
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.
A company is projected to have a free cash flow of $343 million next year, growing...
A company is projected to have a free cash flow of $343 million next year, growing at a 4.6% rate until the end of year 3. After that, cash flows are expected to grow at a stable rate of 2.4%. The company's cost of capital is 9.7%. The company owes $121 million to lenders and has $9 million in cash. If it has 271 million shares outstanding, what is your estimate for its stock price? Round to one decimal place.
A company is projected to have a free cash flow of $343 million next year, growing...
A company is projected to have a free cash flow of $343 million next year, growing at a 5.6% rate until the end of year 3. After that, cash flows are expected to grow at a stable rate of 2.2%. The company's cost of capital is 12.9%. The company owes $71 million to lenders and has $17 million in cash. If it has 221 million shares outstanding, what is your estimate for its stock price? Round to one decimal place.
Scampini Technologies is expected to generate $50 million in free cash flow next year, and FCF...
Scampini Technologies is expected to generate $50 million in free cash flow next year, and FCF is expected to grow at a constant rate of 6% per year indefinitely. Scampini has no debt or preferred stock, and its WACC is 11%. If Scampini has 45 million shares of stock outstanding, what is the stock's value per share? Round your answer to two decimal places. Each share of common stock is worth $____ , according to the corporate valuation model.
Scampini Technologies is expected to generate $150 million in free cash flow next year, and FCF...
Scampini Technologies is expected to generate $150 million in free cash flow next year, and FCF is expected to grow at a constant rate of 7% per year indefinitely. Scampini has no debt or preferred stock, and its WACC is 12%. If Scampini has 60 million shares of stock outstanding, what is the stock's value per share? Round your answer to two decimal places. Each share of common stock is worth $ , according to the corporate valuation model.
A company is projected to have a free cash flow of $400 million next year, growing...
A company is projected to have a free cash flow of $400 million next year, growing at a 5% rate until the end of year 3. After that, cash flows are expected to grow at a stable rate of 2.5% in perpetuity. The company's cost of capital is 8.0%. The company owes $110 million to lenders and has $5 million in cash. If it has 250 million shares outstanding, what is your estimate for its stock price? Round to one...
Scampini Technologies is expected to generate $25 million in free cash flow next year, and FCF...
Scampini Technologies is expected to generate $25 million in free cash flow next year, and FCF is expected to grow at a constant rate of 3% per year indefinitely. Scampini has no debt or preferred stock, and its WACC is 10%. If Scampini has 45 million shares of stock outstanding, what is the stock's value per share? Do not round intermediate calculations. Round your answer to the nearest cent. Each share of common stock is worth $   , according to the...
Year : 1 2 3 4 5 Free Cash Flow: $23 million $27 million $28 million...
Year : 1 2 3 4 5 Free Cash Flow: $23 million $27 million $28 million $31 million $34 million XYZ Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 3% per year. If the weighted average cost of capital is 10% and XYZ has cash of $11 million, debt of $43 million, and 79 million shares outstanding, what is General...
Scampini Technologies is expected to generate $200 million in free cash flow next year, and FCF...
Scampini Technologies is expected to generate $200 million in free cash flow next year, and FCF is expected to grow at a constant rate of 3% per year indefinitely. Scampini has no debt, preferred stock, or non-operating assets, and its WACC is 14%. If Scampini has 55 million shares of stock outstanding, what is the stock's value per share? Do not round intermediate calculations. Round your answer to the nearest cent. Each share of common stock is worth $   , according...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT