Duncan Street Mills is an all-equity firm with 32,000 shares of stock outstanding.The firm expects sales of $520,000 next year.Sales are expected to grow by 8 percent for the following 2 years and then level off to a constant 3 percent growth rate.Net cash flow varies in direct proportion to sales and is currently equal to 16 percent of sales.The required return is 17 percent.What is the estimated current value of one share of stock?

Question

Quizplus · Accepted Answer

Net cash flow_{Year 1} = 0.16 × $520,000 = $83,200 Terminal value_{Year 3} = ($83,200 × 1.08² × 1.03)/ (0.17 − 0.03)= $713,970.10 Total firm value = $83,200 / 1.17 + ($83,200 × 1.08)/ 1.17² + [($83,200 × 1.08²)+ $713,970.10] / 1.17³ = $643,125.76 Price per share = $643,125.76 / 32,000 = $20.10

Duncan Street Mills Is an All-Equity Firm with 32,000 Shares