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24 June, 00:36

ou are valuing a company that is projected to generate a free cash flow of $10 million next year, growing at a stable 3.0% rate in perpetuity thereafter. The company has $22 million of debt and $8.5 million of cash. Cost of capital is 10.0%. There are 50 million shares outstanding. How much is each share worth according to your valuation analysis

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  1. 24 June, 00:48
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    Each share worth is $2.59

    Explanation:

    According to the given data we have the following:

    D1 = Cash Flow at the end of year 1 = $ 10 million

    r = Cost of Capital = 10% = 0.1

    g = perpetual growth of cash flows

    Hence, The present value of Cash Flows = D1 / (r-g)

    = 10 / (0.1-0.03)

    =10/0.07

    = $ 142.8571428571 million

    = $ 142.86 million

    To find the equity value we need to remove the net debt from cash flows

    Net Debt = Debt - Cash

    = 22 - 8.5

    = $ 13.5 million

    Now net cash flows = Cash Flows - Net Debt

    = 142.86 - 13.5

    = $ 129.36 million

    Therefore, each share worth = Present Value of Cash Flow / No of Outstanding Shares

    = 129.36 / 50 (Both values are in millions so the zeros are ignored)

    = 2.5872

    = $2.59

    Each share worth is $2.59
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