Question 4
A firm’s end-of-year free cash flow is anticipated to be $17 million. The firm’s free cash flows are expected to grow 2 percent a year, forever. The firm’s weighted average cost of capital is 14.25 percent, and the firm has 2 million common stock outstanding shares. If the firm has $10 million in preferred stock and long-term debt, the firm’s estimated intrinsic value of its common stock per share is $
. Calculate to two decimal points using the following formula: PV = ((FCF / (WACC – g)) – total debt) / common shares.

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danielabebe896 danielabebe896 · Answer 1 · 2024-04-16T16:03:24+02:00

Explanation:

To calculate the intrinsic value per share of the firm's common stock, we'll use the formula:

\[ PV = \left( \frac{FCF}{WACC - g} - \text{Total Debt} \right) / \text{Common Shares} \]

Given:

- $ FCF = \$17 $ million

- $ g = 2\% $

- $ WACC = 14.25\% $

- $ \text{Total Debt} = \$10 $ million

- $ \text{Common Shares} = 2 $ million

Let's plug these values into the formula:

\[ PV = \left( \frac{17}{(0.1425 - 0.02)} - 10 \right) / 2 \]

\[ PV = \left( \frac{17}{0.1225} - 10 \right) / 2 \]

\[ PV = \left( \frac{138.77551}{2} - 10 \right) \]

\[ PV = (69.387755 - 10) \]

\[ PV = 59.387755 \]

Rounding to two decimal points, the estimated intrinsic value of the firm's common stock per share is approximately \$59.39.