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Analysts project that Marathon Company's FCF will be $12 million in year 1, $15 million in...

Analysts project that Marathon Company's FCF will be $12 million in year 1, $15 million in year 2, after which FCF is expected to grow at a constant rate of 5%. Its WACC is 12%. The company has $70 million of debt and five million shares of stock outstanding. What is the estimated stock price of Marathon Company?
      
A$26.41      
B$27.42      
C$25.77      
D$29.27      
E$28.50

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Homework Answers

Answer #1

Present value (PV) = sum of present value of all future cash flows

After end of 3 years there is a perpetuity model with constant growth which can be calculated using the formula FCF* (1+ growth rate)/ (return rate - growth rate) which needs to be discounted back from year 2 to year 0 (present value)

PV = 12mn/(1+12%)^1+15mn/(1+12%)^2+ 15mn*(1+5%)/(12%-5%)/(1+12%)^2=$202.04mn

This is the value of the firm. Value of debt to be reduced from above no. to find value of equity.

Value of equity = $202.04- $70 mn =$132.04 mn

Per share value = value of equity / no of shares = $132.04 mn/ 5mn =$26.41 (op a)

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