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5 May, 06:29

Hallowell Inc. has free cash flow of $2.5 million and 1.25 million shares outstanding. If you believe the price to cash flow ratio for this company should be 11, what is the highest price you should pay for the stock?

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  1. 5 May, 09:07
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    The highest price I should pay for the stock is $22.

    Explanation:

    The cash flow is the net cash flow produced from the operations of the company after paying all the operational and capital expenditures. It is the cash which can be distributed between any security-holders and stockholders.

    According to given data

    Free cash flow = 2.5 million

    Outstanding shares = 1.25 million

    Cash flow for each share = Free cash flow / outstanding shares = 2.5 million / 1.25 million = $2 per share

    Price to cash flows ratio = price of share / cash flow per share

    11 = Price of share / $2 per share

    Price of share = 11 x $2 = $22
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