You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow (FCF1) is expected to be $70.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the future, the company has $200 million of long-term debt and preferred stock, and it has 30 million shares of common stock outstanding. Assume the firm has zero non-operating assets. What is the firm's estimated intrinsic value per share of common stock

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Answer:

$40

Explanation:

To calcuate the intrinsic value per share, we have to first calculate the Firm value;

Firm value = [tex]FCF1[/tex] ÷ [tex](WACC - Growth rate)[/tex]

= $70 ÷ (10% - 5%)

= $1,400 Million

The Stock price is calculated as;

(Firm value - Debt) ÷ No. of shares

= ($1,400 Million - $200 Million) ÷ 30 Million shares

= $40