Garbanzo Corporation generated free cash flow of $81 million this past year. For
ID: 2781391 • Letter: G
Question
Garbanzo Corporation generated free cash flow of $81 million this past year. For the next two years, the company's free cash flow is expected to grow at a rate of 11%. 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 14% and Garbanzo Corporation has cash of $195 million, debt of $216 million, and 92 million shares outstanding, what is Garbanzo Corporation's expected current share price?
Explanation / Answer
FCF for year 1=(81*1.11)=$89.91
FCF for year 2=(89.91*1.11)=$99.8001
Value after year 2=(FCF for year 2*Growth rate)/(WACC-Growth rate)
=(99.8001*1.04)/(0.14-0.04)=$1037.92104
Hence current total value=Future FCF*Present value of discounting factor(14%,time period)
=89.91/1.14+99.8001/1.14^2+1037.92104/1.14^2
=$954.308(Approx)
Add:cash $195
Less:debt($216)
Total value of equity=$933.308million
Hence current share price=($933.308million/92 million)=$10.14(Approx).
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