According to the value-based management model, what is the stock price per share
ID: 2492296 • Letter: A
Question
According to the value-based management model, what is the stock price per share given the following data?
Year
1
Revenue
700.00
Other income
25.00
Fixed costs
90.00
Variable costs
280.00
Additional investment in NWC
3.00
Additional investment in operating long-term assets
80.00
Depreciation
75.00
Tax rate
0.40
The free cash flow is expected to grow at 8% from year 1 to year 5 and 6% after year 5 to infinity. WACCcomp = 20%.
Market value of the firm:
Price per share
Number of shares
Market value
Long-term debt
700.00
Preferred stock
7.00
10
70.00
Common stock, equity
15.00
100
1,500.00
Total
2,270.00
Market value of non-operating short-term assets=50
Market value of non-operating long-term assets=80
Select one:
a. $7.22
b. $8.54
c. $6.90
d. $9.97
e. $5.68
Year
1
Revenue
700.00
Other income
25.00
Fixed costs
90.00
Variable costs
280.00
Additional investment in NWC
3.00
Additional investment in operating long-term assets
80.00
Depreciation
75.00
Tax rate
0.40
Explanation / Answer
Note: Additional investment in NWC, Additional investment in operating long-term assets and Other income are not recurring nature and accordingly not concidered for free cash flows.
Note: Additional casf flow =25-3-80 = - 58
Perpetual Value of Cash flows after 5th year = Cash Flow * Growth/(Cost of capital - Growth rate), applying Gordon's growth model.
= 310.2*1.06/(0.20-0.06) = 2348.59
Present value of 2348.59 = 2348.59*DF @20% for 5th year = 2348.59*0.402 = 943.84
Price per share based on discounted cash flow basis would be $10.34
Cash Flow Statement of Year 1 Particulars Amount $ Revenue 700 Other income - non-recurring nature, so not concidered for free cash flows 0 Total revenue 700 Less variable Cost -280 Less Fixed Cost Cost -90 Less Depreciation, assumed it is not included in above fixed cost -75 Profit before tax 255 Less Tax -102 Net Income 153 Add Depreciation 75 Free Cash Flow 228Related Questions
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