Question

Year                          1    2          3      &n

Year                          1    2          3               4                 5
Free Cash Flow $22 million $25 million $30 million $31 million $34 million

XYZ Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 1% per year. If the weighted average cost of capital is 7% and XYZ has cash of $13 million, a debt of $31 million, and 73 million shares outstanding, what is General Industries' expected current share price?

Round to the nearest one-hundredth.

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Answer #1

Calculating the Value of Firm/Enterprise value using Discounted Factor model:

EV = 20.56 + 21.84 + 24.49 + 23.65 + 24.24 + 408.07

EV = $ 522.85 millions

Enterprize Value = Value of equity + Debt - Cash

$522.85 million = Value of equity + $31 million - $ 13 million

value of Equity = $ 504.85 million

- Value of Equity = Share Price*no of shares outstanding

Share Price = $504.85 million/73million

Share price = $ 6.92 per share

General Industries' expected current share price is $ 6.92

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