Gonzales Corporation generated free cash flow of $81million this year. For the n
ID: 2641990 • Letter: G
Question
Gonzales Corporation generated free cash flow of $81million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 9%. 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 12% and Gonzales Corporation has cash of $90 million, debt of $250 million, and 100 million shares outstanding, what is Gonzales Corporation's expected current share price?
A.$9.93
B. $ 9.43
C. $12.91
D. $11.42
Explanation / Answer
Gonzales Corporation generated free cash flow of $81million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 9%. 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 12% and Gonzales Corporation has cash of $90 million, debt of $250 million, and 100 million shares outstanding, what is Gonzales Corporation's expected current share price?
Enterprise Value = 81*1.09/1.12 + 81*1.09^2/1.12^2+ (81*1.09^2*1.04/(12%-4%))/1.12^2
Enterprise Value = $ 1152.894 Million
Equity Value = 1152.894 - 250 + 90
Equity Value = $ 992.894 Million
Corporation's expected current share price = 992.894/100
Corporation's expected current share price = $ 9.93
Answer
A.$9.93
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