Answer:
The company's stock price today should be $71.17 per share.
Explanation:
The corporate valuation model approach can be used to estimate this by using the following steps:
<u>Step 1: Calculation of the free cash flow</u>
Free cash flow is the cash a firm generates after accounting for capital expenditure. This can be estimated using the following formula:
Free Cash Flow (FCF) = After-tax operating income + Depreciation expenses - Capital expenditure
For this question, we therefore have:
Free Cash Flow (FCF) = $700 + $150 - $375 = $475 million
<u>Step 2: Calculation of Value of operations (Vo)</u>
Vo = FCF / (WACC - FCF growth rate) = 475 / (11% - 7%) = $11,875 million
<u>Step 3: Calculation of the Firm value</u>
Firm value = Vo + Non-operating assets = $11,875 + $199 = $12,074 million
<u>Step 4: Calculation of value of equity</u>
Value of equity = Firm value - Debt = $12,074 - $3,534 = $8,540 million
Note: The correct amount of debt is $3,534 not $3.540 as mistakenly given, may be due to typographical error, in the question.
Step 5: Calculation of stock price per share today
Stock price per share = Value of equity / Number of shares outstanding = $8,540 / 120 = $71.17 per share
Therefore, the company's stock price today should be <u>$71.17</u> per share.
