Year Free Cash Flow 21 27 28 27 33 1 2 3 45 American Industries is expected to g

Question

Year Free Cash Flow 21 27 28 27 33 1 2 3 45 American Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 4% per year. If the discount rate is 12% and American Industries has cash of $20 million. debt of $43 million, and 77 million shares outstanding, what is American Industries' expected current share price? Round your answer to two decimal places, and omit dollar signs and commas (i.e., enter $2,001.2001 as 2001.20)

Explanation / Answer

Value after year 5=(FCF for year 5*Growth rate)/(Discount rate-Growth rate)

=(33*1.04)/(0.12-0.04)=$429

Hence current total value=Future FCFs*Present value of discounting factor(12%,time period)

=21/1.12+27/1.12^2+28/1.12^3+27/1.12^4+33/1.12^5+429/1.12^5

=$339.51million(Approx)

Hence value of stock=(339.51+20-43)=$316.51million(Approx)

Hence current share price=(316.51/77)=$4.11(Approx)

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