You expect ABC Corporation to generate the following free cash flows over the next five years: Year 1 2 3 4 5 FCF...

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Finance

You expect ABC Corporation to generate the following free cashflows over the next five years:
Year
1
2
3
4
5
FCF ($ millions)
75
84
96
111
120
Beginning with yearsix, you estimate that ABC's free cash flows will grow at 6% peryear and that ABC's weighted average cost of capital is 15%.
If ABC has $500 million of debt, $50 million of cash, and 14million shares of stock outstanding, then what is the price pershare for ABC Corporation?

Answer & Explanation Solved by verified expert

4.4 Ratings (578 Votes)

	WACC=	15.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	75		75	1.15	65.2174
2	75	0.00%	84		84	1.3225	63.51607
3	84	0.00%	96		96	1.520875	63.12156
4	96	0.00%	111		111	1.74900625	63.46461
5	111	0.00%	120	1413.333	1533.333	2.011357188	762.3375
	Long term growth rate (given)=	6.00%			Value of Enterprise =	Sum of discounted value =	1017.66

Where
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 5 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor

Enterprise value = Equity value+ MV of debt

- Cash & Cash Equivalents

1017.66 = Equity value+500-50

Equity value = 567.66

share price = equity value/number of shares

share price = 567.66/14

share price = 40.55

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Transcribed Image Text

You expect ABC Corporation to generate the following free cashflows over the next five years:Year12345FCF ($ millions)758496111120Beginning with yearsix, you estimate that ABC's free cash flows will grow at 6% peryear and that ABC's weighted average cost of capital is 15%.If ABC has $500 million of debt, $50 million of cash, and 14million shares of stock outstanding, then what is the price pershare for ABC Corporation?