The firm just paid dividend $2.5 per share. Dividende will grow ten percent for
ID: 2720006 • Letter: T
Question
The firm just paid dividend $2.5 per share. Dividende will grow ten percent for three years. After that they are expected to be constant forever (exact same amunt at year 3 dividend)
FCF: 42 million cash: 10 million debt: 72 million outstanding shares : 12 million equity cost of capital is 17%
WACC is 13% median enterprise value to free cash flows ratio of comparable firma is 7.5
A) use dividend discount model, what is esimate price of equity on per share basis?
B) use discounted cash flow model-what is estimated price of equity on per share basis?
C) using multiples of comparable firms what is the estimated proce of equity on per share basis?
Explanation / Answer
A) price of equity on per share basis using dividend discount model
dividend(d0) = 2.5 per share
d1 =d0 * (1+g) = 2.5* (1+ .10) = 2.75
d2 =d1 * (1+g) = 2.75* (1+ .10) = 3.025
d3 =d2 * (1+g) = 3.025* (1+ .10) = 3.3275
p = d4/(cost of equity - growth) = (3.3275 * 1.1 )/ (.17- .10) = 52.29
B) Estimated price of equity on per share basis using discounted cash flow model
TV = CF (1+ g) / Ko - g
= 42 * (1+.10) / {.17-0.10}
= 660
price per share = TV / number of outstanding shares
=660/ 12 = 55
C)
free cash flows ratio of comparable firm = earnings / FCF
7.5 = Earnings / 42
earnings = 315
price per share = Earnings / number of outstanding shares
=315 / 12 = 26.25
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