Question

Patrick Company expects to generate freeminuscash of​ $120,000 per year forever. If the​ firm's required return is 12​ percent, the market value of debt is​ $300,000, the market value of preferred stock is​ $70,000, and the company has​ 100,000 shares of stock outstanding. What is the value of​ Patrick's stock?

Answer 1

Answer:

$6.3 per share

Explanation:

There are two method of Valuation of the firm

• Weighted average cost of the capital (WACC)
• Free cash flow to equity (FCFE)

We have to calculate the value of the firm using FCFE. Free cash flow to equity (FCFE) is the amount of cash flow generated by the business and potentially available for distribution among the stockholders.

Value of firm = Free cash flow / required rate of return = $120,000 / 12% = $1,000,000

Market value of Equity = Total value of firm - Market value of Debt - Market value of Preferred share

Market value of Equity = $1,000,000 - $300,000 - $70,000 = $630,000

Value of​ Patrick's stock = Market Value of equity / shares of stock outstanding = $630,000 / 100,000 = $6.3 per share