Answer:
Firm's estimated intrinsic value per share of common stock = $40.00
Explanation:
Intrinsic value:
Intrinsic value is a way of describing the perceived or true value of an asset.
Formula:
Intrinsic value = free cash flow / required rate - growth rate
As the end-of-year free cash flow (FCF1) = $30 and it is expected to grow at a constant rate of 5.0% a year thereafter.
so FCF2 = 30 (1 + 5%)
FCF2 = 31.5
Value at year 1 = FCF2 / required rate - growth rate
Therefore by putting the values in the above formula, we get
Value at year 1 = 31.5 / 0.08 - 0.05
Value at year 1 = 31.5 / 0.03
Value at year 1 = 1,050
As the company’s WACC is 8.0%, so
Value today = 30 / (1 + 0.08)1 + 1,050 / (1 + 0.08)1
Value today = $1,000 million
As stated in the question it has $200 million of long-term debt, and there are 20.0 million shares of common stock outstanding.
Intrinsic value = (1,000 - 200) / 20
Intrinsic value = $40.00
