River Enterprises has $502 million in debt and 22 million shares of equity outstanding. Its excess cash reserves are $ 15 milli

Question

4 years ago

6

River Enterprises has $502 million in debt and 22 million shares of equity outstanding. Its excess cash reserves are $ 15 milli

on. They are expected to generate $195 million in free cash flows next year with a growth rate of 2% per year in perpetuity. River Enterprises' cost of equity capital is 13%. After analyzing the company, you believe that the growth rate should be 3% instead of 2%. How much higher (in dollars) would the price per share be if you are right? g

Business

1 answer:

Sedbober [7] · Answer 1 · 2021-12-28T14:23:24+03:00

Answer:

The stock price would be higher by $7.37

Explanation:

Free cash flow to equity = 195 million with a growth rate of 2% in perpetuity

Value of equity = Free cash flow to equity ÷ (Ce -g) = 195 million ÷ (13% - 2%)

= 190 ÷ 0.11 = $1,772,727,272.73 = $1,773 million

If growth rate is 3%, value of equity = 195 ÷ (13%-3%) = 195 ÷ 0.1 = $1,950 million

a. Value of stock = (1,773 + 15) million ÷ 22 = $81.27

b. Value of stock with 3% = 1,950 ÷ 22 = $88.64

Thus stock price would be higher by = b-a = $7.37

River Enterprises has ​$502 million in debt and 22 million shares of equity outstanding. Its excess cash reserves are $ 15 milli

River Enterprises has $502 million in debt and 22 million shares of equity outstanding. Its excess cash reserves are $ 15 milli