A firm has free cash flow of $500,000 on their most recent financial statements.

Question

A firm has free cash flow of $500,000 on their most recent financial statements. The firm expects the FCF’s to grow at about 2.5% per year. The cost of capital for the firm is 10.50%. The firm’s financials also revealed that the firm has marketable securities valued at $0.75 million as well as total debt of $1 million and preferred stock totaling $250,000. The firm has total assets of $8 million and sales of $4.5 million. If the firm has 400,000 shares outstanding and 500,000 shares authorized, what is the intrinsic value of common equity per share?

Explanation / Answer

Value of the firm can be calculated as follows

Value of firm = Next year free cash flow / (Cost of capital - growth rate)

= 500000 * (1+2.5%) / (10.50% - 2.50%) = 6,406,250.00

Value of the firm = Value of debt + value of preferred equity + value of common stock

6,406,250.00 = 1,000,000 + 250,000 + value of common stock

So value of common stock = 5,156,250.00

So intrinsic value of share = 5,156,250.00 / 400,000 = $12.89

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.