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.

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