Question

Year 0 1 Revenue 850.00

Fixed costs 100.00

Variable costs 200.00

Additional investment in NWC 10.00

Additional investment in operating long-term assets 70.00

Depreciation 60.00

Interest expenses 35.00

Newly issued debt 25.00

Principle repayments 15.00

Net change in debt 10.00

Tax rate 0.40

Market value of the firm:

Price per share No. of shares Market value Short-term debt 100.00

Long-term debt 600.00

Preferred stock 10.00 10 100.00

Common stock, equity 18.00 100 1,800.00

Total 2,600.00

Cost of equity (Rs) 0.1400

Growth rate per year from year 1 through year 5 0.12

Growth rate after year 5 0.05

According to the equity free cash flow model, what is the stock price per share?

Answer 1

Free Cash Flow to Equity (FCFE) = Net Income + Depreciation - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment

Net Income = (Revenue - Fixed Costs - Variable Costs - Depreciation - Interest Exp) x (1 - tax rate )

Net Income = (850 - 100 - 200 - 60 - 35) x (1 - 40%) = $273  

FCFE = 273 + 60 - 70 - 10 + 25 - 10 = $263

Total Value of Equity = $263

Stock price per share can be calculated by dividing total value of equity by no. of shares outstanding.