Question

You are valuing a company that is projected to generate a free cash flow of $16 million next year, growing at a stable 2.8% rate in perpetuity thereafter. The company has $23 million of debt and $8 million of cash. Cost of capital is 10.6%. There are 44 million shares outstanding. How much is each share worth according to your valuation analysis? Round to one decimal place.

Answer 1

Answer:

$4.3

Explanation:

For computing the share price, first, we have to compute the Value of firm which is shown below

= Free cash flow ÷ (cost of capital - growth rate)

= $16 million ÷ (10.6% - 2.8%)

= $16 million ÷ 7.8%

= $205.12 million

Now find the equity value which equals to

= Value of firm - debt value + cash

= $205.12 million - $23 million + $8 million

= $190.12 million

And, the number of outstanding shares is 44 million

So, the price per share would equal to

= Equity value ÷ number of outstanding shares

= $190.12 million ÷ 44 million shares

= $4.3