Atchley Corporation's last free cash flow was $1.55 million.The free cash flow growth rate is expected to be constant at 1.5% for 2 years, after which free cash flows are expected to grow at a rate of 8.0% forever.The firm's weighted average cost of capital (WACC) is 12.0%.Atchley has $2 million in short-term debt and $14 million in debt and 1 million shares outstanding.What is the best estimate of the intrinsic stock price?

Question

Quizplus · Accepted Answer

The correct answer is A because the intrinsic stock price is $25.05. The formula for the intrinsic stock price is:Intrinsic stock price = Present value of all future free cash flows / Number of shares outstandingThe present value of all future free cash flows can be calculated using the following formula:Present value of all future free cash flows = Free cash flow * (1 + Growth rate) / (WACC - Growth rate)For the first two years, the free cash flow growth rate is 1.5%. After that, the free cash flow growth rate is 8.0%. The WACC is 12.0%.The present value of all future free cash flows is:Present value of all future free cash flows = $1.55 million * (1 + 0.015) / (0.12 - 0.015) + $1.55 million * (1 + 0.015)^2 / (0.12 - 0.015) + $1.55 million * (1 + 0.08) / (0.12 - 0.08) / (1 + 0.08)= $1.55 million * 1.015 / 0.105 + $1.55 million * 1.015^2 / 0.105 + $1.55 million * 1.08 / 0.04 / (1 + 0.08)= $1.55 million * 9.615 + $1.55 million * 9.434 + $1.55 million * 20.000 / 1.08= $14.94 million + $14.67 million + $27.78 million= $57.39 millionThe intrinsic stock price is:Intrinsic stock price = $57.39 million / 1 million shares= $25.05

Atchley Corporation's Last Free Cash Flow Was $1