Decker Tires' free cash flow was just FCF0 = $1.32. Analysts expect the company's free cash flow to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The WACC for this company 9.00%. Decker has $4 million in short-term investments and $14 million in debt and 1 million shares outstanding. What is the best estimate of the stock's current intrinsic price?

Question

Quizplus · Accepted Answer

rs = 9.0%
 $\begin{array}{lcccc}
\text { Year } & 0 & 1 & 2 & 3 \
\text { Growth rates: } & & 30.0 \% & 10.0 \% & 5.0 \% \
\text { FCF } & \$ 1.32 & \$ 1.716 & \$ 1.888 & \$ 1.982 \
\text { Horizon value }=\mathrm{FCF}_{3} /\left(\mathrm{WACC}-\mathrm{g}_{3}\right)= & & 49.550 & & \
\hline \text { Total CFs } & & \$ 1.716 & \$ 51.437 & \
\mathrm{PV} \text { of CFs } & & \$ 1.574 & \$ 43.294 &
\end{array}$ 
Short-term investments = $4 million Debt = $14 million Value of operations = $44.87 Intrinsic value of equity = ($44.87 + 4 - 14)/1 = $34.87 million

Decker Tires' Free Cash Flow Was Just FCF0 = $1