A company has $100 million in assets and $40 million in debt. There are 1 million shares
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Question:
A company has $100 million in assets and $40 million in debt. There are 1 million shares of stock outstanding. The cost of equity is 13% and the cost of debt 5%. Tax rate is 20%.
The firm expects the following free cash flow (in millions) for the next five years, after which it is expected to grow at a rate of 3% per year:
Year | FCFF | FCFE |
1 | 10 | 7 |
2 | 12 | 10 |
3 | 14 | 12 |
4 | 16 | 14 |
5 | 18 | 15 |
- 1) Compute the estimated stock price per share by finding the total value of the firm (use the FCFF and the WACC as the discount rate) and subtracting out the value of the debt?
2) Compute the estimated stock price by using the FCFE and the cost of equity as the discount rate?
Related Book For
Financial Institutions Management A Risk Management Approach
ISBN: 978-0071051590
8th edition
Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders
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