Green Planet, Inc., a manufacturer of air filter systems for industrial facilities, is considering the addition of a new system to its current product line. The following data has been forecasted:

	2018	2019	2020	2021
Depreciation	30,000	35,000	40,000	45,000
EBIT	100,000	125,000	150,000	175,000
Investment in Operating Assets	30,000	40,000	50,000	60,000

The market value of the firm's debt is $300,000, and it has $150,000 in marketable securities. The company also has 10,000 shares of preferred stock that pay an annual dividend of $0.75 per share. Investors require a rate of return of 7% on preferred stocks of similar risk. The firm has 100,000 shares of common stock outstanding, and its weighted average cost of capital is 12%. The expected tax rate is 35% in the next two years and 40% after that.

 a) Calculate the free cash flow for each of the next four years.

b) After 2021 the firm's free cash flow is expected to grow at 5% per year indefinitely. What is the value of the stock today?

c) Assume that after 2021 the firm's free cash flow is expected to grow at 9% per year for four years. After that time, the firm's free cash flow will grow at 5% indefinitely. Using the two-stage dividend growth model, what is the value of the stock?

Answer rating: 100% (QA)

To calculate the free cash flow FCF for each of the next four years we can use the following formula FCF EBIT1 Tax Rate Depreciation Capital Expenditu... View the full answer