Question

Covan, Inc. is expected to have the following free cash​ flow: LOADING.... a. Covan has million shares​ outstanding, ​$ million in excess​ cash, and it has no debt. If its cost of capital is ​, what should be its stock​ price? b. Covan adds its FCF to​ cash, and has no plans to add debt. If you plan to sell Covan at the beginning of year​ 2, what is its expected​ price? c. Assume you bought Covan stock at the beginning of year 1. What is your expected return from holding Covan stock until year​ 2? a. Covan has million shares​ outstanding, ​$ million in excess​ cash, and it has no debt. If its cost of capital is ​, what should be its stock​ price?

Answer 1

Answer:

Since the numbers are missing, I looked for a similar question.

a)

year        FCF (in millions)

1                      $10

2                     $12

3                     $13

4                     $14

5                     4% growth rate

terminal value at year 4 = ($14 x 1.04) / (0.1 - 0.04) = $242.67

the firm's total value = $10/1.1 + $12/1.1² + $13/1.1³ + $14/1.1⁴ + $242.67/1.1⁴ + $2 (excess cash) = $9.09 + $9.92 + $9.77 + $9.56 + $165.75 + 2 = $206.09

price per stock = $206.09 / 7 = $29.44

b) excess cash $12

the firm's total value = $12/1.1 + $13/1.1² + $14/1.1³ + $242.67/1.1³ + $12 (excess cash) = $10.91 + $10.74 + $10.52 + $182.32 + $12 = $226.49

price per stock = $226.49 / 7 = $32.36

c) capital gains yield = ($32.36 - $29.44) / $29.44 = 9.92%