Answer:
a) $1,300 million
b) $1,115.91 million
c) $112.39
Explanation:
To find horizon value, value of operations, and the stock price we need to go through calculations using appropriate formulas.
DATA
Free CashFlow, 2021 = $20 million
Free CashFlow,, 2022 = $30 million
Free CashFlow,, 2023 = $50 million
Growth Rate = 4%
Cost of Capital = 8%
Value of Long-term Debt = 12 million
Value of marketable securities = $20 million
outstanding shares = 10 million
Working
Free CashFlow,, 2024 = Free CashFlow,, 2023 * (1 + Growth Rate)
Free CashFlow,, 2024 = $50 million * 1.04
Free CashFlow,, 2024 = $52 million
Horizon Value
Horizon Value = Free CashFlow, 2024 / (Cost of Capital - Growth Rate)
Horizon Value = $52 million / (0.08 - 0.04)
Horizon Value = $52 million / 0.04
Horizon Value = $1,300 million
Value of operation
Value of Operations = $20 million / 1.08 + $30 million / 1.08^2 + $50 million / 1.08^3 + $1,300 million / 1.08^3
Value of Operations = $1,115.91 million
Stock price
To find the price per share we need to find the value of equity first
Value of Equity = Value of Operations - Value of Long-term Debt + Value of Marketable Securities
Value of Equity = $1,115.91 million - $12.00 million + $20.00 million
Value of Equity = $1,123.91 million
Price per share = Value of Equity / Number of Shares
Price per share = $1,123.91 million / 10 million
Price per share = $112.39
