7) Gonzales Corporation generated free cash flow of $86 million this year. For t

Question

7) Gonzales Corporation generated free cash flow of $86 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 10%. 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 11% and Gonzales Corporation has cash of $100 million, debt of $275 million, and 100 million shares outstanding, what is Gonzales Corporation's expected current share price?

A) $14.37

B) $11.87

C) $12.49

D) $16.24

Please show financial calculator steps of what to input where, Thanks!

Explanation / Answer

Free Cash Flow Year 1 (FCF1) = $86 million × (1 + 0.1) = $94.6 million; Free Cash Flow Year 2 (FCF2) = $86 million × (1 + 0.1)^2 = $104.06 million; Free Cash Flow Year 3( FCF3) = 104.06 million × (1 + 0.04) = $108.2224 million V2 = $108.2224 million / (0.11 - 0.04) = $1546.03 million using a financial calculator, V0 = $1424.48 million P0 = (1424.48 million - 275 million + 100 million) / 100 million = $12.49

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