Luthor Corp. is expected to generate a free cash flow (FCF) of $4,215.00 million

Question

Luthor Corp. is expected to generate a free cash flow (FCF) of $4,215.00 million this year (FCF1 $4,215.00 million), and the FCF is expected to grow at a rate of 20.20% over the following two years (FCF2 and FCFs). After the third year, however, the FCF is expected to grow at a constant rate of 2.46% per year, which will last forever (FCF·If Luthor Corp.'s weighted average cost of capital (WACC) is 7.38%, what is the current total firm value of Luthor Corp.? O $115,667.44 million O $140,060.16 million O $138,800.93 million O $13,237.80 million Luthor Corp.'s debt has a market value of $86,751 million, and Luthor Corp. has no preferred stock. If Luthor Corp. has 525 million shares of common stock outstanding, what is Luthor Corp.'s estimated intrinsic value per share of common stock? O $55.08 O $165.24 O $54.08 O $60.59

Explanation / Answer

FCF1=4215

FCF2=(4215*1.202)=5066.43

FCF3=(5066.43*1.202)=6089.4886

Value after year 3=(FCF3*Growth rate)/(WACC-Growth rate)

=(6089.4886*1.0246)/(0.0738-0.0246)=$126822.3403

Hence current total value=Future cash flows*Present value of discounting factor(7.38%,time period)

=4215/1.0738+5066.43/1.0738^2+6089.4886/1.0738^3+126822.3403/1.0738^3

=$115,667.44 million(Approx)

Hence intrinsic value=(115667.44-86751)/525

=$55.08

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