Gonzales Corporation generated free cash flow of $88 million this year. For the

Question

Gonzales Corporation generated free cash flow of $88 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 8%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 10% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected current share price?

PLEASE ANSWER STEP BY STEP

Explanation / Answer

1st yr 95.04

2nd yr 102.64+(88*1.080^2)*(1.04)/(.1-.04)=1881.7 -------

I=10% NPV=1641.52

P=(1641.52+100-300)/100=14.42

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