The free cash flows (in millions) shown below are (WACO) is l 1% and FCF is expe

Question

The free cash flows (in millions) shown below are (WACO) is l 1% and FCF is expected to grow at a rateof projected for 3 M Company. The weighted average cost of capital after Year 4. Year Free cash flow -$50 $100 $150 200 the company's balance sheet shows $80 million in accounts receivable, 560 million in inventory termnvestments that are unrelated to operations. The balance sheet also shows $90 million in accounts retained earnings, and $800 million in total common equity. If th what is the best estimate of the stock's price per share? (50 Pts) nes n s ntes payable, $300 million in long-term debt, $50 million in preferred stock, $180 million n e company has 60 million shares of stock outstanding,

Explanation / Answer

Terminal value at year 4 = FCF (1+g)/(WACC-G)

                 = 200 (1+ .05)/(.11- .05)

                 = 200 * 1.05 / .06

                 = $ 3500

Present value of FCF = [PVF11%,1*FCF1]+[PVF11%,2*FCF2]+....[PVF 11%,4*Terminal value 4]

    = [.90090*-50]+[.81162*100]+[.73119*150]+[.65873*200]+[.65873*3500]

   = -45.045+81.162+ 109.6785+131.746+2305.555

    = $ 2583.0965

Value of equity = Value of firm -value of long term debt - preferred stock

      = 2583.0965 - 300 -50

      = 2233.0965

stock price per share =value of equity /shares outstanding

        = 2233.0965 / 60

        = $ 37.22 per share

**PVF =1/(1+i)^n

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