A firms weighted average cost of capital is 11%, and it has $1500000 of debt at

Question

A firms weighted average cost of capital is 11%, and it has $1500000 of debt at market value and $400,000 of preferred stock. The estimated free cash flow over the next 5 years, 2013-2017, are given below. Beyond 2017 to infinity, the firm expects it sfree cash flow to grow by 3% annually.
Year free cash flow
2013 $200,000
2014 250,000
2015 310,000
2016 350,000
2017 390,000
a. what is the value of entire company using the free cash flow valuation model?
b.what is the common stock value?
c.if the firm plans to issue 200,000 shares of common stock, whats its estimated value per share?

Explanation / Answer

a. Value of company = $200,000/1.11 + 250,000/1.11^2 + 310,000/1.11^3 + 350,000/1.11^4 + 390,000/1.11^5 + (390,000*1.03/(11%-3%))/1.11^5 = $4,051,624.46 b. common stock value = $4,051,624.46 $1500000- $400,000 = $2,151,624.46 c. estimated value per share =$2,151,624.46/200,000 = $10.758

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