1. According to the value-based management model, what is the stock price per sh
ID: 2438420 • Letter: 1
Question
1. According to the value-based management model, what is the stock price per share given the following data?
Year
1
Revenue
850.00
Fixed costs
100.00
Variable costs
280.00
Additional investment in NWC
3.00
Additional investment in operating long-term assets
80.00
Depreciation
75.00
Tax rate
0.40
The free cash flow is expected to grow at 10% per year from year 1 to year 5 and 6% per year after year 5 to infinity.
WACCcomp =12%.
Market value of the firm:
Price per share
Number of shares
Market value
Long-term debt
700.00
Preferred stock
7.00
10
70.00
Common stock, equity
15.00
100
1,500.00
Total
2,270.00
Market value of non-operating short-term assets=50
Market value of non-operating long-term assets=80
Select one:
a. $37.07
b. $24.97
c. $30.21
d. $34.28
e. $27.54
Year
1
Revenue
850.00
Fixed costs
100.00
Variable costs
280.00
Additional investment in NWC
3.00
Additional investment in operating long-term assets
80.00
Depreciation
75.00
Tax rate
0.40
Explanation / Answer
Given Data:
cash flow is expected to grow = 10%
From year 1 to year 5 and 6% per year after year 5 to infinity
Free cash flow in 1 year:
=(850-100-280-75)*(1-0.40)+75-3-80
=229
Enterprise value:
220-1.12+229*1.1/1.12^2+229*1.1^2/1.12^3+229*1.1^3/1.12^*4+229*1.1^4/1.12^5+229*1.1^4*1.06/(1.12^5*(0.12-0.06))
= 4347.4732
Common stock value =4347.4732+50-700-70+80
=3707.4732/100
share price =37.07
Therefore Option A is correct.
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