This year, Huxley Building Supplies\' free cash flow is $1.75 million. Its free
ID: 2778523 • Letter: T
Question
This year, Huxley Building Supplies' free cash flow is $1.75 million. Its free cash flow growth rate is expected to be constant at 25% for 2 years, after which free cash flows are expected to grow at a rate of 6% forever. Its weighted average cost of capital WACC is 12%. Huxley has $5 million in short-term investments and $7 million in debt and has 1 million shares outstanding. What is the best estimate of the current intrinsic stock price?
$39.58
$40.64
$42.64
$41.71
$44.92
a.$39.58
b.$40.64
c.$42.64
d.$41.71
e.$44.92
Explanation / Answer
enterprise value = (1.75*(1.25))/(1.12)^1+(1.75*(1.25)^2)/(1.12)^2+((1.75*(1.25)^2*1.06)/0.06)/(1.12)^2 =42.64 million
market cap = enterprise value - debt + investments
=42.64 -7 + 5 = 40.64 million
price = 40.64 million /1million = 40.64 per share (b is the right choice)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.