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Fundamentals of Financial Manageme...

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

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

CORPORATE VALUATION Smith Technologies is expected to generate $150 million in free cash flow next year, and FCF is expected to grow at a constant rate of 5% per year indefinitely. Smith has no debt or preferred stock, and its WACC is 10%. If Smith has 50 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.

Corporate Valuation Models:

Corporate valuation model evaluates a firm based on the free cash flow of future periods that the business will generates. 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 free cash flow. Statement of cash flow reports the cash flow generated or consumed by the business.

Explanation

Given,

FCF is $150 million.

g is 5%or 0.05.

WACC is 10% or 0.10.

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 free cash flow.

Substitute $150 for FCF, 0.10 for WACC and 0.05 for g,

P0=$1500.100

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