ABC's latest free cash flow (FCF0) is $100 million. Free cash flow is expected to increase by 30 percent next year and 20 percent in the second year. After two years, it is expected to grow forever at a steady rate of 5 percent. The cost of common stock (rs) is 12% and the weighted average cost of capital (WACC) is 10%. ABC's balance sheet shows $20 million in short-term investments unrelated to operations. The balance sheet also shows $150 million in debt, $50 million in preferred stock and $200 million in common stock. 

If the company has 50 million common shares, what's your best guess for the share price per share today? Assume that the book values of the company's debt and preferred stocks are very close to their market values.

Please solve the problem without using Excel.

Answer rating: 100% (QA)

First lets calculate the present value of the free cash flows FCF for the next two years and the ter... View the full answer