Danielsen's has 15,000 shares of stock outstanding and projected annual free cash flows of $48,200,$57,900,$71,300,and $72,500 for the next four years,respectively.After that,the cash flows are expected to increase at a constant annual rate of 1.6 percent.What is the current value per share of stock at a discount rate of 15.4 percent?
A)$31.57
B)$29.06
C)$28.99
D)$26.14
E)$34.08

Question

Quizplus · Accepted Answer

The correct answer is A because the current value per share of stock at a discount rate of 15.4 percent is $31.57. This can be calculated using the Gordon Growth Model, which is:Current Value per Share = (Projected Annual Free Cash Flow / (Discount Rate - Constant Annual Growth Rate))In this case, the projected annual free cash flows are $48,200, $57,900, $71,300, and $72,500 for the next four years, respectively. After that, the cash flows are expected to increase at a constant annual rate of 1.6 percent. The discount rate is 15.4 percent.Plugging these values into the formula, we get:Current Value per Share = ($48,200 + $57,900 + $71,300 + $72,500) / (0.154 - 0.016) = $31.57

Danielsen's Has 15,000 Shares of Stock Outstanding and Projected Annual