Question

1- Rexton Oil is an all-equity firm with 250 million of shares outstanding. Rexton currently has a cash flow of $290 Million of USDs and expects future free cash flows of $60 Millions per year. Management plans to use the cash to expand the firm's operations, which will in turn increase future cash free cash flows to $99 Millions per year. If the cost of capital of Rexton's investments is 9%, calculate the stock price for the company if the expansion where to happen.

2- Rexton Oil is an all-equity firm with 250 million of shares outstanding. Rexton currently has a cash flow of $290 Million of USDs and expects future free cash flows of $60 Millions per year. Management plans to use the cash to expand the firm's operations, which will in turn increase future cash free cash flows to $99 Millions per year. If the cost of capital of Rexton's investments is 9%, calculate the stock price if the company decides to use the cash for a share repurchase rather than the expansion.

Answer 1

1

IF COMPANY DOES EXPANSION, THE ANNUAL FREE CASH FLOW WILL BE $99 MILLION PER YEAR

SO ENTERPRISE VALUE AFTER EXPANSION = ANNUAL FREE CASHFLOW/ COST OF CAPITAL =

ENTERPRISE VALUE = $99/0.09 = $1100 MILLION

NO OF SHARES = 250 MILLION

STOCK PRICE = $1100/250 = $4.4 PER SHARE

2

IF COMPANY GOES FOR REPURCHASE,

ENTERPRISE VALUE = $60/0.09 = $666.67 MILLION

MARKET VALUE OF COMPANY = CASH + ENTERPRISE VALUE = $290 + $666.67 = $956.67 MILLION

NO OF SHARES = 250 MILLIONS

STOCK PRICE = $956.67/250 =$3.83 PER SHARE