Peter is an analyst at Holt Investment and he has been directed by his supervisor to determine
Question:
Peter is an analyst at Holt Investment and he has been directed by his supervisor to determine the value of Holt Construction Company. Peter reviewed Holt's financial statement and forecasts it's free cash flows over the next five years are as follows:
Year | 2015 | 2016 | 2017 | 2018 | 2019 |
Free cash flow | $400,000 | 300,000 | 550,000 | 450,000 | 400,000 |
Peter believes that the FCF will cease to grow beyond the year 2019. Furthermore, Peter calculated that the weighted average cost of capital of the firm is 7% while the market required the return of equity is 13%. Holt's financial statements stated that the company's capital structure contains only debt and equity, while the market value of the debt/equity ratio is always maintained at 0.5. Holt has 1,000,000 shares of common stock outstanding.
a. Based on the information above, estimate the value of Holt Construction Company's entire company by using the free cash flow valuation model.
b. What is Holt's stock price based on your answer in part a?
c. If Holt plans to increase the use of debt in the next year and change its debt/ equity ratio to 0.3, what will be the stock price next year?
Probability and Statistics
ISBN: 978-0321500465
4th edition
Authors: Morris H. DeGroot, Mark J. Schervish