Hi I was hoping to get help with question 7 Based on the following information,

Question

Hi I was hoping to get help with question 7

Based on the following information, what is the stock price per share according to the equity free cash flow model?

Select one:

a. $16.55

b. $13.59

c. $14.32

d. $15.51

e. $12.02

Year 0 1 Revenue 600.00 Fixed costs 100.00 Variable costs 200.00 Add. investment in NWC 10.00 Add. investment in operating long-term assets 70.00 Depreciation 60.00 Interest expenses 35.00 Newly issued debt 25.00 Principle repayments 15.00 Market value of the firm: Price Number Market per share of shares value Short-term debt 100.00 Long-term debt 600.00 Preferred stock 10.00 10 100.00 Common stock 18.00 100 1,800.00 Total 2,600.00 Cost of equity (Rs) 0.1500 Tax rate 0.40 Growth rate per year: From year 1 through year 5 0.10 After year 5 0.07

Explanation / Answer

First we need to calculate Net Income as :- 600-100-200-60-35 = 205 and we will be paying tax on this at 40%. So, our after tax income is = 205*(1-0.40) = 123

FCFE for Year 1 = 123-10-70+60+25-15 = $113.

Now, this will grow at 10% from Year 1 toYear 5 and then it will stabilise at 7%, so now we need to design two stage FCFE model, the first stage is high growth period and second stage is constant growth period.

Now see the following table :-

The closes approximate to this price is 13.59 which will be our answer.

Growth rate 10% Growth rate 7% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 FCFE 113 124.3 136.73 150.40 165.44 177.02 Discount rate 15% 15% 15% 15% 15% 15% Present Value 98.26 93.99 89.90 85.99 82.25 So, now we get the Present values to High growth period, and now we need to calculate the termina value for constant growth period Terminal price = Expected FCFE/R-G 177/(15%-7%) 2212.5 PV of Terminal price 2212/1.15^6 956.31 PV Today = PV of FCFE during high growth phase + PV of Terminal Price 98.26+93.99+89.90+85.99+85.25+956.31 1406.71 Preferred share holder contribution to be deducted 100 Present value for equity shareholders 1306.71 Number of share 100 Price per share 13.07

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