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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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CORPORATE VALUATION Scampini Technologies is expected to generate $25 million in free cash flow next year, and FCF is expected to grow at a constant rate of 4% per year indefinitely. Scampini has no debt or preferred stock, and its WACC is 10%. If Scampini has 40 million shares of stock outstanding, what is the stock’s value per share?

Summary Introduction

To compute: The stock value per share for Company S.

Introduction:

Corporate Valuation Models: Corporate valuation model evaluates a firm based on the free cash flow of future periods that the business will generate. It also considers the present value of those future free cash flows.

Free Cash Flow: The cash generated over and above required by business operations and capital expenditure is called as the free cash flow. Statement of cash flow reports the cash flow generated or consumed by the business.

Explanation

Given information:

FCF is $25 million.

Constant rate (g) is 4%or 0.04.

WACC is 10% or 0.10.

Number of outstanding shares is 40 million.

The formula to compute intrinsic value of the firm,

P0=FCFWACCg

Where,

  • P0 is the current value of the firm.
  • g is the growth rate.
  • FCF  is the free cash flow.

Substitute $25 for FCF, 0.10 for WACC and 0.04 for g,

P0=$25 million0.100

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