Problem 12.

Using the information below, answer the questions:

Firm named Galaxy has a free cash flow (FCF) of $13 million.

Galaxy's net income is $50million and total book equity is $105million

Galaxy's debt-to-equity ratio is 1.25

Galaxy's market value of debt is 150 million

Galaxy's tax rate is 25%

Galaxy's FCF and earnings will grow at a constant rate of 3%

Galaxy's equity beta is 1.3

US 3 month T-bill rate is 1.5%

S&P 500 market return is 7.5%

Currently Galaxy Interiors do not pay dividends.

There are 10 million shares outstanding.

#1) What should be the fair stock value per share using the Residual Income Model (RIM) ?

#2) What should be the fair stock value per share using the Free Cash Flow (FCF) Valuation

model?

Multiple choices

#1) stock price per share with RIM = approx. $24

#1) stock price per share with RIM = approx. $77

#1) stock price per share with RIM = approx. $15

#1) stock price per share with RIM = approx. $69

#2) stock price per share with FCF model = approx. $59

#2) stock price per share with FCF model = approx. $84

#2) stock price per share with FCF model = approx. $38

#2) stock price per share with FCF model = approx. $41