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30 March, 04:27

You must estimate the intrinsic value of Lowell Technologies' stock. The end-of-year free cash flow (FCF1) is expected to be $30 million, and it is expected to grow at a constant rate of 5.0% a year thereafter. The company's WACC is 8.0%, it has $200 million of long-term debt, and there are 20.0 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock? $34.00 $36.00 $38.00 $40.00 $42.00

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  1. 30 March, 04:31
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    Firm's estimated intrinsic value per share of common stock = $40.00

    Explanation:

    Intrinsic value:

    Intrinsic value is a way of describing the perceived or true value of an asset.

    Formula:

    Intrinsic value = free cash flow / required rate - growth rate

    As the end-of-year free cash flow (FCF1) = $30 and it is expected to grow at a constant rate of 5.0% a year thereafter.

    so FCF2 = 30 (1 + 5%)

    FCF2 = 31.5

    Value at year 1 = FCF2 / required rate - growth rate

    Therefore by putting the values in the above formula, we get

    Value at year 1 = 31.5 / 0.08 - 0.05

    Value at year 1 = 31.5 / 0.03

    Value at year 1 = 1,050

    As the company's WACC is 8.0%, so

    Value today = 30 / (1 + 0.08) 1 + 1,050 / (1 + 0.08) 1

    Value today = $1,000 million

    As stated in the question it has $200 million of long-term debt, and there are 20.0 million shares of common stock outstanding.

    Intrinsic value = (1,000 - 200) / 20

    Intrinsic value = $40.00
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