At the end of 2016, Newerks Inc. forecasts that its free cash flow will be $50 m
ID: 2791923 • Letter: A
Question
At the end of 2016, Newerks Inc. forecasts that its free cash flow will be $50 million in 2017, $60 million in 2018, and $72 million in 2019. After 2019, Newerks expects its free cash flow earnings to grow at an annual rate of 6%. Newerks has $75 million in debt and $25 million in cash. If Newerks has 5 million shares outstanding and a cost of capital of 14%, what is Newerks stock price at the end of 2016? At the end of 2016, Newerks Inc. forecasts that its free cash flow will be $50 million in 2017, $60 million in 2018, and $72 million in 2019. After 2019, Newerks expects its free cash flow earnings to grow at an annual rate of 6%. Newerks has $75 million in debt and $25 million in cash. If Newerks has 5 million shares outstanding and a cost of capital of 14%, what is Newerks stock price at the end of 2016? At the end of 2016, Newerks Inc. forecasts that its free cash flow will be $50 million in 2017, $60 million in 2018, and $72 million in 2019. After 2019, Newerks expects its free cash flow earnings to grow at an annual rate of 6%. Newerks has $75 million in debt and $25 million in cash. If Newerks has 5 million shares outstanding and a cost of capital of 14%, what is Newerks stock price at the end of 2016?Explanation / Answer
Enterprise Value = FCF1 / (1 + r) + FCF2 / (1 + r)^2 + FCF3 / (1 + r)^3 + FCF3 x (1 + g) / (r - g) x (1 + r)^3
= 50 / 1.14 + 60 / 1.14^2 + 72 / 1.14^3 + 72 x 1.06 / (14% - 6%) x 1.14^3
= $782.55 million
Enterprise Value = Equity Value + Debt Value - Cash
=> Equity Value = 782.55 - 75 + 25 = $732.55 million
Stock Price = Equity Value / No. of shares = 732.55 / 5 = $146.51
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