Question

If the expected long-run growth rate for this stock is free cash flow during the just-ended year (t = 0) was $120 million, and FCF is expected to grow at a constant rate of 7% in the future. If the weighted average cost of capital is 15%, what is the firm's value of operations, in millions? 5%, and if investors' required rate of return is 11.5%, what is the current stock price?

Answer 1

Firm value in millions 1,605‬ (one thousand six houndred five milllions)

Step-by-step explanation:

To evaluate a firm based on the free cash flow we do a procedure similar to gordon dividend grow model

`(divends_1)/(return-growth) = Intrinsic \: Value`

We are going to replace dividend for the free cash flow

and the return for the WACC

notice we are given with the current FCF and for the gordon model we require dividend for the next year. (time=1)

here we need the same

FCF x (1+g) = 120 x (1 + 0.07) = 128.4

WACC .15

grow 0.07

`(128.4)/(.15-.07) = $Firm Value`

Firm value in millions 1,605‬ (one thousand six houndred five milllions)