Hanover Inc.is an all-equity firm with 35,000 shares of stock outstanding.The firm expects sales of $750,000 next year.Sales are expected to grow by 10 percent the following year and then level off to a constant 4 percent growth rate.Net cash flow varies in direct proportion to sales and is currently equal to 17 percent of sales.The required return for this firm is 14 percent.What is the estimated current value of one share of stock?

Question

Quizplus · Accepted Answer

Net cash flow_{Year 1} = 0.17 × $750,000 = $127,500 Terminal value_{Year 2} = ($127,500 × 1.10 × 1.04)/ (0.14 − 0.04)= $1,458,600 Current firm value = $127,500 / 1.14 + [($127,500 × 1.10)+ $1,458,600] / 1.14² = $1,342,105.26 Price per share = $1,342,105.26 / 35,000 = $38.35