You are considering buying common stock in Grow On, Inc. You have calculated that the firm's...

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Finance

You are considering buying common stock in Grow On, Inc. Youhave calculated that the firm's free cash flow was $5.90 millionlast year. You project that free cash flow will grow at a rate of8.0% per year indefinitely. The firm currently has outstanding debtand preferred stock with a total market value of $10.20 million.The firm has 1.79 million shares of common stock outstanding. Ifthe firm's cost of capital is 23.0%, what is the most you shouldpay per share for the stock now?

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3.8 Ratings (735 Votes)

Per share stock value today is $18.03

Step-1:Calculation of value of firm

As per discounted cash flow method, value of firm is the present value of cash flow from bond.

Present value of cash flow

FCF0*(1+g)/(K-g)

Where,

5.90*(1+0.08)/(0.23-0.08)

FCF0

Free cash flow of last year

$ 5.90

million

$ 42.48

million

Growth rate

Cost of capital

23%

Step-2:Calculation of value of common shares

million

Value of firm

$ 42.48

Less value of debt and preferred stock

$ 10.20

Value of shares of common stocks

$ 32.28

Step-3:Calculation of per share value

Per share value

Value of shares of common stock

Number of common shares

$ 32.28

million

1.79

million

$ 18.03

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You are considering buying common stock in Grow On, Inc. Youhave calculated that the firm's free cash flow was $5.90 millionlast year. You project that free cash flow will grow at a rate of8.0% per year indefinitely. The firm currently has outstanding debtand preferred stock with a total market value of $10.20 million.The firm has 1.79 million shares of common stock outstanding. Ifthe firm's cost of capital is 23.0%, what is the most you shouldpay per share for the stock now?

You are considering buying common stock in Grow On, Inc. You have calculated that the firm's...

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50.1K

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Finance

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