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Suppose General Foods has decided to enter the soda business and they will require additional capital....

Suppose General Foods has decided to enter the soda business and they will require additional capital. Management will finance the project by borrowing $100 million and by haulting dividend payments. Management forecasts that free cash flow for the next two years will be -$50, and $35 million. After year 2 the cash flows will grow at a rate of 4%. The current WACC for General foods is 9.7%. What is the firms price per share given there are 50 Million Shares outstanding?

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Answer #1

Free cash flow for year 1 to 2 has been provided

g = Growth rate of FCF beyond year 2 = 4% per year forever

WACC = 9.7%

Calculating the Enterprise Value ($ millions):-

EV = -45.5789 + 29.0840 + 530.6562

EV = $514.16 millions

- Enterprise Value = Market Value of equity + Market Value of Debt

$514.16 millions = Market Value of equity + $100 million

Market Value of equity= $414.16 million

- Intrinsic Price per share = Market Value of equity/No of shares outstanding

= $414.16 million/50 million

Intrinsic Price per share = $8.28

So, the firms price per share is $8.28

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