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AutoCar’s free cash flow was just FCF0 = $1.30. Analysts expect the company's free cash flow...

AutoCar’s free cash flow was just FCF0 = $1.30. Analysts expect the company's free cash flow to grow by 30% this year, by 10% in Year 2, and then at a constant rate of 5% in Year 3 and thereafter. The WACC for this company 9.00%. AutoCar has $4 million in short-term investments and $14 million in debt and 2 million shares outstanding. What is the best estimate of the stock's current intrinsic price? If the market price is $33 do you buy or sell?

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Answer #1

Value of Firm = PV of FCFs

Value of firm after 2 years = FCF3 / (WACC - g)

Computation of FCFs:

Value of firm after 2 Years = FCF3 / (WACC - g)

= $ 1.95 / (9% - 5%)

= $ 1.95 / 4%

= $ 48.80

Value of firm Today: PV of FCFs arising from it

Value of Equity = Value of Firm - Out side debts

= $ 44.19 - $ 4 - $ 14

= $ 26.19

Value of Sare = Value of Equity / No. od shares

= $ 26.19 M / 2M

= $ 13.09

If market price is $33, It is more than its intrinsic Value ($ 13.09)

Hence Over priced, adviced to sell

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