CORPORATE VALUE MODEL Assume that today is December 31, 2016, and that the follo

Question

CORPORATE VALUE MODEL Assume that today is December 31, 2016, and that the following information applies to Abner Airlines: After-tax operating income [EBIT(1 - T)] for 2017 is expected to be $600 million. The depreciation expense for 2017 is expected to be $150 million. The capital expenditures for 2017 are expected to be $250 million. No change is expected in net operating working capital. The free cash flow is expected to grow at a constant rate of 4% per year. The required return on equity is 13%. The WACC is 11%. The market value of the company's debt is $4 billion. 310 million shares of stock are outstanding. Using the corporate valuation model approach, what should be the company's stock price today? Round your answer to the nearest cent. Write out your answer completely. For example, 0.00013 million should be entered as 130. $

Explanation / Answer

FCFF = 600 + 150 - 250 - 0 = 500 million

value of firm = 500*1.04/(0.11 - 0.04) = 7,428.57

value of equity = 7,428.57 - 4000 = 3,428.57

stock price = 3,428.57/310 = 11.06

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