Patrick Company expects to generate free cash flow of $120,000 per year forever.If the firm's required return is 12 percent,the market value of debt is $300,000,the market value of preferred stock is $70,000,and the company has 100,000 shares of stock outstanding.What is the value of Patrick's stock?

Question

Quizplus · Accepted Answer

The correct answer is A.The value of Patrick's stock can be calculated using the Gordon Growth Model:Value of Stock = Free Cash Flow / (Required Return - Growth Rate)Since the free cash flow is expected to grow at a constant rate of 0% (forever), the growth rate is 0%.Therefore, the value of Patrick's stock is:Value of Stock = $120,000 / (0.12 - 0) = $1,000,000Since the company has 100,000 shares of stock outstanding, the value of each share is:Value per Share = $1,000,000 / 100,000 = $10.00Therefore, the correct answer is A) $10.00.

Patrick Company Expects to Generate Free Cash Flow of $120,000