You have been assigned the task of using the corporate, or free cash flow, model
ID: 2767063 • Letter: Y
Question
You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation’s intrinsic value. The firm’s WACC is 10.00%, its end-of-year free cash flow (FCF1) is expected to be $75.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the future, the company has $200 million of long-term debt and preferred stock, and it has 30 million shares of common stock outstanding. What is the firm’s estimated intrinsic value per share of common stock?
a. $40.35
b. $41.82
c. $43.33
d. $44.85
e. $46.42
Explanation / Answer
Firm value = FCF1÷(WACC-Growth rate)
= $75÷(10%-5%)
= $1,500 Million
Stock price = (Firm value-Debt)÷Number of shares
= ($1,500 Million-$200 Million)÷30 Million shares
= $43.33
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