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?

Question

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?

Answer 1

To estimate Petry's Corporation's intrinsic value per share of common stock using the corporate, or free cash flow (FCF), model, we need to follow a few steps:

Step 1: Calculate the Free Cash Flow to Firm (FCFF)
The FCFF represents the cash flow available to all capital providers of the company (debt and equity holders). It can be calculated using the formula:
FCFF = FCF * (1 + g) / (WACC - g)
Where:
- FCF is the end-of-year cash flow, which is $90.0 million in this case.
- g is the expected growth rate of the FCFs, which is 5.00% per year.
- WACC is the weighted average cost of capital, which is 10.00% in this case.

So, FCFF = $90.0 million * (1 + 0.05) / (0.10 - 0.05)

Step 2: Calculate the Enterprise Value (EV)
The Enterprise Value represents the present value of all future FCFF. It can be calculated by dividing the FCFF by the WACC:
EV = FCFF / WACC

Step 3: Subtract Debt and Preferred Stock
To arrive at the equity value, we need to subtract the value of debt and preferred stock from the enterprise value:
Equity Value = EV - Debt and Preferred Stock

Step 4: Calculate the Intrinsic Value per Share
Finally, divide the equity value by the number of shares outstanding to get the intrinsic value per share of common stock:
Intrinsic Value per Share = Equity Value / Number of Shares

Given that Petry's Corporation has $200 million of long-term debt and preferred stock and 30 million shares of common stock outstanding, we can now substitute the values and calculate the intrinsic value per share.

Please note that the actual intrinsic value per share may also depend on other factors that are not included in this calculation, such as market sentiment and industry trends.