Question

Huxley Building Supplies' last free cash flow was $1.75 per share . Its free cash flow growth rate is expected to be constant at 25% for 2 years, after which free cash flows are expected to grow at a rate of 6% forever. WACC is 12%. Huxley has $5 in short-term investments per share and $7 debt per share. What is the best estimate of the current intrinsic stock price?

Answer 1

Answer:

$40.6344 per share

Explanation:2.

Complete question "Huxley has $5 million in short-term investments and $7 million in debt and has 1 million shares outstanding. What is the best estimate of the current intrinsic stock price?"

Calculation of the value of firm is as below

Yr      Cash flow  Growth rate   New c.flow   Pv at 12%   Pv of cash flows

1            1.75                 25%            2.1875         0.893              1.9534

2           2.1875             25%            2.7344        0.797               2.1793

TCM                                                48.3083      0.797               38.5017

                                                      Value of firm                        42.6344

Note: TCM = Terminal cash floe = 2.7344*(1.06) / 12% - 6% = 48.3083 million

Now, Market value of firm = 42.6344 + 5 - 7 = 40.6344 million

Market price per share = $40.6344 million/1 million = $40.6344 per share