Part 3 130 Points-Valuation The forecasted free cash flows for ProCom Inc., are

Question

Part 3 130 Points-Valuation The forecasted free cash flows for ProCom Inc., are shown below: Free cash flow (S million) 2019 $250 $230 $260 rowth is espected to be constant after 2020. The companys beta is 1,30, the market risk prerant are unrebaed and he risk-free rate is .00%. Its balance sheet shows sis million in short-term investments that are unrelated to operations, 599 million in accounts payable, $600 million in long-term debt, and $100 million in preferred stock. The company has 60 million shares of stock outstanding. REQUIRED: What is the best estimate of the company stock's price per share?

Explanation / Answer

As per CAPM

Ke = Rf + beta * Risk premium

Ke – Cost of equity

Rf – Risk free rate of return – 1 %

Risk premium – 5 %

Beta – 1.3

                = 1% + 1.3 * 5%

                = 6.5%

Growth rate (2019 – 2020) = (260 – 250)/250 * 100 = 4 %

Expected free cash flow in year 2020 = 260 million

Value of equity = Expected Free cash flow/ (ke - g)

                                = 260/ (6.5% - 4%)                           

                                = 260/2.5%

                                = $ 10,400 million

Price per share of equity = Value of equity/no of shares

                                                = 10,400/60

                                                = $ 173.333

Stock price per share = $ 173.333

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