Question

A company’s weighted average cost of capital is 10.8% per year and the market intrinsic value of its debt is $33.1 million. The company’s free cash flow next year is expected to be $4.7 million and the free cash flow is expected to grow forever at a rate of 3.7% per year. If the company has three million shares of common stock outstanding, what is the intrinsic value per share? Question 6 options: A) $13.72 B) $9.48 C) $11.03 D) $12.24 E) $15.12

Answer 1

Answer:

C. $11.03

Explanation:

We need to first compute the firm's value which is shown below.

Firm's value = Free cash flow ÷ (Weighted average cost of capital - Growth rate)

Firm's value = $4.7 million ÷ ( 10.8% - 3.7%)

= $4.7 million ÷ 7.1%

= $66,197,183

Stock price = (Firm value - Debt) ÷ Number of shares

= ($66,197,183 - $33,100,000) ÷ 3,000,000

= $33,097,183 ÷ 3,000,000

= $11.03