ABC’s the most recent free cash flow (FCF0) is $200 million. The free cash flow is expected to grow at a rate of 40 percent in next year and 20 percent in the second year.
finance
Description
HW 2 (10
points)
ABC’s
the most recent free cash flow (FCF0) is $200 million. The free cash flow is expected to grow at a
rate of 40 percent in next year and 20 percent in the second year. After two
years, it is expected to grow forever at a constant rate of 5 percent. The cost of common stock (rs) is 12%
and the weighted average cost of capital (WACC) is 8%. ABC’s balance sheet shows $10 million in
short-term investments (marketable securities) that are unrelated to operations
and $10 million in minority investment in another company. The balance sheet also shows $100 million in debt,
$50 million in preferred stocks, and $250 million in common stocks. If the
company has 40 million shares of common stocks, what is your best estimate
for the stock price per share today?
Assume that company’s book values of debt and preferred stocks are very
close to the market values. Using
Excel, calculate ABC’s stock price using FCF based valuation model and
using “Two Way Data Table” of the
Excel, show the sensitivity of the stock prices to the growth rate and
the discount rate. (Use the stable
growth rate from 2% to 8% in 1% increment and use a discount rate from 5% to 11%
in 1% increment.)
