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18 November, 12:55

Banco Macro is expected to generate $150 million in free cash flow next year, and the free cash flow is expected to grow at a constant rate of 4% per year indefinitely. Banco Macro has no preferred stock or debt and its WACC is 6.85%.

If Banco Macro has 40 million in stock outstanding, what is its stock value per share?

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  1. 18 November, 15:47
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    Stock value per share = $136.8

    Explanation:

    The value of a firm can be determined using the free cash flow and the Discount cash flow model.

    The discounted cash flow model values a firm as the the sum of the present values of the future cash flows generated by the assets of the firm discounted at an appropriate required rate of return. This rate of return (discount rate) is called Weighted average cost of capital (WACC)

    The weighted Average cost of Capital is the average cost of capital for the different sources of long-term capital available to a firm weighted according to the proportion each source of finance bears to the total capital in the pool.

    Free cash flow to the Firm (FCFF) is the cash flow from operations minus capital expenditures. It is the cash flow available to all providers of capital after all investments in non-current assets and working capital have been made.

    Value of a firm = FCFF (1+g) / (WACC-g)

    g - growth rate

    Value of Banco = 150 * (1+0.04) / (0.0685 - 0.04)

    =5473.684211

    Value per stock = (Value of the firm - Value of Debt) / No of stock units

    = 5473.68 - 0

    40 million units

    Stock value per share = $136.8
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