Lex Corp. is expected to generate a free cash flow (FCF) of $11,275 million in o

Question

Lex Corp. is expected to generate a free cash flow (FCF) of $11,275 million in one year, and the FCF is expected to grow at a rate of 20.20% over the following two years. After the third year, however, the FCF is expected to grow at a constant rate of 2.46% per year, which will last forever. Lex Corp.'s debt has a market value of $232,055 million, and Lex Corp. has no preferred stock. If the company has 450 million shares of common stock outstanding and weighted average cost of capital (WACC) of 7.38%, what is the value of its common stock according to the Corporate Valuation Model?

Explanation / Answer

Lex Corp Year 1 Year 2 Year 3 Year 4 FCF increase Rate   20.2% 20.2% 2.46% FCF amount in $ Millions           11,275           13,553          16,290 WACC =7.38% Terminal Value of FCF at year 3 end=16290*1.0246/(0.0738-0.0246)=       339,246 Total FCF=           11,275           13,553       355,536 PV factor @7.38%=           0.9313           0.8673          0.8077 PV of FCF =           10,500           11,754       287,153 Sum of PV of FCF=         309,407 Value of Firm in $ Million         309,407 Market Value of Debt in $ million         232,055 Market value of Equity $ Million           77,352 Outstanding common stock in Million=                 450 Market Value per Common stock=77352/450= $       171.89

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