Ask Question
5 December, 22:09

River Enterprises has $502 million in debt and 22 million shares of equity outstanding. Its excess cash reserves are $ 15 million. They are expected to generate $195 million in free cash flows next year with a growth rate of 2 % per year in perpetuity. River Enterprises' cost of equity capital is 13 %. After analyzing the company, you believe that the growth rate should be 3 % instead of 2 %. How much higher (in dollars) would the price per share be if you are right? g

+4
Answers (1)
  1. 5 December, 22:34
    0
    The stock price would be higher by $7.37

    Explanation:

    Free cash flow to equity = 195 million with a growth rate of 2% in perpetuity

    Value of equity = Free cash flow to equity : (Ce - g) = 195 million : (13% - 2%)

    = 190 : 0.11 = $1,772,727,272.73 = $1,773 million

    If growth rate is 3%, value of equity = 195 : (13%-3%) = 195 : 0.1 = $1,950 million

    a. Value of stock = (1,773 + 15) million : 22 = $81.27

    b. Value of stock with 3% = 1,950 : 22 = $88.64

    Thus stock price would be higher by = b-a = $7.37
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “River Enterprises has $502 million in debt and 22 million shares of equity outstanding. Its excess cash reserves are $ 15 million. They are ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers