You are considering buying common stock in Everest, Inc. You have calculated tha
ID: 2659129 • Letter: Y
Question
You are considering buying common stock in Everest, Inc. You have calculated that the firm's free cash flow was $8.10 million last year. You project that free cash flow will grow at a rate of 6.0% per year indefinitely. The firm currently has outstanding debt and preferred stock with a total market value of $9.22 million. The firm has 1.20 million shares of common stock outstanding. If the firm's cost of capital is 25.0%, what is the most you should pay per share for the stock now?
**If you are able, please provide the steps/equations so that I can rework this problem on my own.
You are considering buying common stock in Everest, Inc. You have calculated that the firm's free cash flow was $8.10 million last year. You project that free cash flow will grow at a rate of 6.0% per year indefinitely. The firm currently has outstanding debt and preferred stock with a total market value of $9.22 million. The firm has 1.20 million shares of common stock outstanding. If the firm's cost of capital is 25.0%, what is the most you should pay per share for the stock now? **If you are able, please provide the steps/equations so that I can rework this problem on my own.Explanation / Answer
Let V0 represent the total value of the firm based on the free cash flow model.
V0=[8.10(1+ 0.06)]/[0.25- 0.06]=45.19
Value of firm = value of debt and preferred + value of equity
45.19 = 9.22 + value of equity
value of equity = 35.97
value per share = (total value)/(number of shares)
value per share = (35.97)/(1.2) = 29.98
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