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CORPORATE VALUE MODEL Assume that today is December 31, 2015, and that the following information applies to Vermeil Airlines: After-tax operating income EBIT (1–T) for 2016 is expected to be $500 million. The depreciation expense for 2016 is expected to be $100 million. The capital expenditures for 2016 are expected to be $200 million. No change is expected in net operating working capital. The free cash flow is expected to grow at a constant rate of 6% per year. The required return on equity is 14%. The WACC is 10%. The market value of the company’s debt is $3 billion. 200 million shares of stock are outstanding. Using the corporate valuation model approach, what should be the company’s stock price today?

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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977
BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

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Chapter
Section
Chapter 9, Problem 20P
Textbook Problem

CORPORATE VALUE MODEL Assume that today is December 31, 2015, and that the following information applies to Vermeil Airlines:

  • After-tax operating income EBIT (1–T) for 2016 is expected to be $500 million.
  • The depreciation expense for 2016 is expected to be $100 million.
  • The capital expenditures for 2016 are expected to be $200 million.
  • No change is expected in net operating working capital.
  • The free cash flow is expected to grow at a constant rate of 6% per year.
  • The required return on equity is 14%.
  • The WACC is 10%.
  • The market value of the company’s debt is $3 billion.
  • 200 million shares of stock are outstanding.

Using the corporate valuation model approach, what should be the company’s stock price today?

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Chapter 9 Solutions

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