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maria [59]
3 years ago
6

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?
Business
1 answer:
Anna [14]3 years ago
6 0

Answer:

$40.6344 per share

Explanation:2.

Complete question <em>"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?"</em>

<u>Calculation of the value of firm is as below</u>

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               <u>38.5017</u>

                                                      Value of firm                        <u>42.6344</u>

<u />

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

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