You have been assigned the task of using the corparate ,or free cash flow , model to estimate Petry's Corporation intrinsic value. the firm WACC is 10.00% , its end of year cash flow ( FCF)IS EXPECTED TO BE 90.0 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 perferred stock and it has 30 million shares of common stock outstanding.What is the firms wstimated intrinsic value per share of common stock?
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To calculate the intrinsic value per share of common stock using the corporate (or free) cash flow model, you need to follow these steps:
1. Calculate the present value of the future free cash flows (FCFs) expected to be generated by the company. This is done using the formula:
PV = FCF / (WACC - g)
where PV is the present value of the FCFs, FCF is the expected end-of-year cash flow, WACC is the Weighted Average Cost of Capital, and g is the expected growth rate of FCF.
In this case, FCF = $90 million, WACC = 10.00%, and g = 5.00%.
PV = $90 million / (10.00% - 5.00%) = $90 million / 5.00% = $1.8 billion
2. Subtract the total long-term debt and preferred stock from the calculated present value. In this case, the total long-term debt and preferred stock amount is $200 million.
Intrinsic value = PV - debt and preferred stock = $1.8 billion - $200 million = $1.6 billion
3. Divide the calculated intrinsic value by the number of shares of common stock outstanding to get the intrinsic value per share. In this case, there are 30 million shares of common stock outstanding.
Intrinsic value per share = Intrinsic value / number of shares = $1.6 billion / 30 million shares = $53.33
Therefore, Petry's Corporation's estimated intrinsic value per share of common stock is $53.33.