You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow (FCF1) is expected to be $75.0 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 preferred stock, and it has 30 million shares of common stock outstanding. What is the firm's estimated intrinsic value per share of common stock?
A) $40.35
B) $41.82
C) $43.33
D) $44.85
E) $46.42

Question

Quizplus · Accepted Answer

The intrinsic value of the firm is calculated using the formula for the value of a growing perpetuity: Value = FCF1 / (WACC - growth rate). Substituting the given values: Value = $75 million / (0.10 - 0.05) = $1,500 million. Subtract the long-term debt and preferred stock: $1,500 million - $200 million = $1,300 million. Divide by the number of shares: $1,300 million / 30 million shares = $43.33 per share.

You Have Been Assigned the Task of Using the Corporate