Question

You are valuing a company with free cash flows expected to grow at a stable 2.0%...

You are valuing a company with free cash flows expected to grow at a stable 2.0% rate in perpetuity. Analysts are forecasting free cash flows of $36 million for next year (FCFF1). The company has $33 million of debt and $6 million of cash. Cost of capital is 12.6%. There are 15 million shares outstanding. How much is each share worth according to your valuation? Round to one decimal place.

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Answer #1

Answer-

Value of company (firm) = FCFF1 / ( r - g)

Given

FCFF1 = $ 36
r = cost of capital = 12.6 % = 0.126
g = growth rate in perpetuity = 2.0 % = 0.02

Value of company (firm) = $ 36 / ( 0.126 - 0.02) = $ 36 / 0.106 = $ 339.62 million

Value of debt = $ 33 million

Value of Equity = Value of firm - Value of debt
Value of Equity = $ 339.62 m - $ 33 m
Value of Equity = $ 306.62 million

Value of each share = Value of Equity / Number of shares outstanding
Value of each share = $ 306.62 m / 15 m = $ 20.44

Therefore value of each share = $ 20.44

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