Question

Analysts project the following free cash flows (FCFs) for Ezzell Corporation during the next 4 years, after which FCF is expected to grow at a constant 3% rate. Ezzell’s WACC is 10%. Ezzell has $200 in debt and 50 shares of stock. Time 0 1 2 3 4 5 FCF -10 70 25 40 ?? a)What is Ezzell’s value today? b)What should be the current price of Ezzell’s stock?

Answer 1

FCF1 = $-10

FCF2 = $70

FCF3 = $25

FCF4 = $40

After yesr 4 FCF will grow at (g) = 3%

WACC = 10%

Calculating the Value of Ezzell's today:-

Value of firm = - 9.09 + 57.85 + 18.78 + 27.32 + 402

Value of Firm = $ 496.86

So, Ezzell’s value today is $ 496.86

Value of Firm = Value of equity + Debt Value

$496.86 = Value of equity + $200

Value of equity = $ 296.86

No of shares = 50 shares

Current price = Value of equity/No of shares

= $296.86/50

= $ 5.94 per share

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