Question

A firm has 120,000 shares of stock outstanding, a sustainable rate of growth of 3.8%, and $648,200 in next year's free cash flow. What value would you place on a share of this firm's stock if you require a 14% rate of return?A) $48.09.B) $54.02.C) $61.58.D) $52.96

Answer 1

Answer:

option (D) $52.96

Explanation:

Data provided in the question:

Number of stock outstanding = 120,000 shares

Growth rate, g = 3.8% = 0.038

Free cash flow in the next year =  $648,200

Required rate of return, r = 14% = 0.14

Now,

Stock price is calculated as:

Stock price = $\frac{\frac{\textup{Free cash flow}}{r-g}}{\textup{Number of shares outstanding}}$

on substituting the respective values, we get

Stock price = $\frac{\frac{\ 648,200}}{0.14-0.038}}{\textup{120,000}}$

or

Stock price = 52.957 ≈ $52.96

Hence,

the correct answer is option (D) $52.96