Hanover Inc.is an all-equity firm with 27,500 shares of stock outstanding.The firm expects sales of $429,000 next year.Sales are expected to grow by 30 percent the following year and then level off to a constant 6 percent growth rate.Net cash flow varies in direct proportion to sales and is currently equal to 21 percent of sales.The required return for this firm is 18 percent.What is the estimated current value of one share of stock?

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Quizplus · Accepted Answer

Net cash flow_{Year 1} = 0.21 × $429,000 = $90,090 Terminal value_{Year 2} = ($90,090 × 1.30 × 1.06)/ (0.18 − 0.06)= $1,034,533.50 Current firm value = $90,090 / 1.18 + [($90,090 × 1.30)+ $1,034,533.50] / 1.18² = $903,444.92 Price per share = $903,444.92 / 27,500 = $32.85