Question

A company is projected to generate free cash flows of $46 million per year for the next two years, after which it is projected grow at a steady rate in perpetuity. The company's cost of capital is 11.6%. It has $23 million worth of debt and $7 million of cash. There are 13 million shares outstanding. If the exit multiple for this company's free cash flows (EV/FCFF) is 14, what's your estimate of the company's stock price? Round to one decimal place.

Answer #1

Given for the company,

Projected free cash flows $46 million for next two years .

FCFF1 = $46 million

FCFF2 = $46 million

Company's cost of capital Kc = 11.6%

terminal exit value for this company is 14

So, terminal value of the company = 14*46 = $644 million

So, enterprise value is PV of FCFF and TV discounted at Kc

So, EV0 = FCFF1/(1+Kc) + FCFF2/(1+Kc)^2 + TV/(1+Kc)^2

EV0 = 46/1.116 + 46/1.116^2 + 644/1.116^2 = $595.23 million

Value of equity is calculated as:

Value of equity = Enterprise value - Debt + cash = 595.23 - 23 + 7 = $579.23million

Thus market value of equity = $579.23

So stock price per share = Market value of equity/number of shares = 579.23/13 = $44.56 per share

So, company stock price today = $44.56 per share.

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