A company is expected to have free cash flow of $400,000 next year. Cash flows are expected to grow at 11% per year for the next four years (years 2-5). After year 5, the free cash flow is projected to grow at 2% indefinitely. The firm currently has $1 million in debt, 200,000 shares outstanding, and a WACC of 9.5%. What is the value of the firm? What is the price per share of the company's stock?

Question

Business

Rachel Boyer

14 August, 20:28

A company is expected to have free cash flow of $400,000 next year. Cash flows are expected to grow at 11% per year for the next four years (years 2-5). After year 5, the free cash flow is projected to grow at 2% indefinitely. The firm currently has $1 million in debt, 200,000 shares outstanding, and a WACC of 9.5%. What is the value of the firm? What is the price per share of the company's stock?

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Stella Walsh · Answer 1

- The value of the firm: $7,123,117

- Price per share of the company's stock: $30.62

Explanation:

The company's value is equal to the net present value of its expected cash flows discounted at its WACC.

Thus, the company's value is calculated as:

400,000/1.095 + (400,000 x 1.11) / 1.095^2 + (400,000 x 1.11^2) / 1,095^3 + (400,000 x 1.11^3) / 1,095^4 + (400,000 x 1.11^4) / 1,095^5 + (400,000 x 1.11^4 x 1.02) / (0.095 - 0.02) / 1,095^5 = $7,123,117.

The company's equity value = Value of the company - Value of the company's debt = 7,123,117 - 1,000,000 = $6,123,117.

=> Price per share of the company's stock = The company's equity value / Shares Outstanding = 6,123,117 / 200,000 = $30.62.