American Industries is expected to generate the above free cash flows over the n

Question

American Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 4% per year. If the weighted average cost of capital is 12% and American Industries has cash of $41 million, debt of $36 million, and 82 million shares outstanding, what is American Industries' expected current share price?

Round your answer to two decimal places, and omit dollar signs and commas (i.e., enter $2,001.2001 as 2001.20).

Explanation / Answer

Value after year 5=(FCF for year 5*Growth rate)/(WACC-Growth rate)

=(33*1.04)/(0.12-0.04)=$429

Hence total current value=Future FCF*Present value of discounting factor(12%,time period)

=20/1.12+28/1.12^2+27/1.12^3+29/1.12^4+33/1.12^5+429/1.12^5

=$339.98million(Approx)

Hence value of equity=(339.98+41-36)=$349.98million

Hence current share price=(349.98/82)=$4.21(Approx).

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