Question

Please calculate the price per share using the free cash flow model given the following:

You are analyzing Ola Enterprises, a small manufacturing firm. The firm does not pay a dividend, but they've been in existence for 7 years now. The future growth rate is estimated to be 4%. Their weighted average cost of capital is 7.50% and the company has $700,000 in debt. Additionally, the company has 100,000 outstanding shares of common stock. There annual free cash flows are as follows:

Year | FCF | |

2015 | $150,000 | Future growth rate is 4% |

2016 | $200,000 | WACC is 7.5% |

2017 | $225,000 | $700,000 in debt |

2018 | $300,000 | 100,000 common shares |

2019 | $400,000 | No preferred shares |

Answer #1

first we have to calculate continuous value

continuous value = FCF in year 2019*(1+growth rate) / K - g

where K = cost of capital

g = growth rate

continuous value = 400000(1+4%) / 0.075 - 0.04

= 11,885,714

now lets calculate enterprise value which is present value of future free cash flows discounted at WACC

value = (150000 / 1.075) + (200000 / 1.075^2) + (225,000 / 1.075^3) + (300000 / 1.075^4) +

[(400000+11885714) / 1.075^5 ]

= 9,276,078

share price = (enterprise value - debt) / number of shares

= (9276078 - 700000) / 100000

= **$85.76**

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