Use the table for the question(s)below.

-Banco Industries expects sales to grow at a rapid rate over the next three years,but settle to an industry growth rate of 5% in year 4.The spreadsheet above shows a simplified pro forma for Banco Industries.If Banco Industries has a weighted average cost of capital of 12%,$50 million in cash,$60 million in debt,and 18 million shares outstanding,which of the following is the best estimate of Banco's stock price at the start of year 1?

Question

Use the table for the question(s)below.
 
-Banco Industries expects sales to grow at a rapid rate over the next three years,but settle to an industry growth rate of 5% in year 4.The spreadsheet above shows a simplified pro forma for Banco Industries.If Banco Industries has a weighted average cost of capital of 12%,$50 million in cash,$60 million in debt,and 18 million shares outstanding,which of the following is the best estimate of Banco's stock price at the start of year 1?

Quizplus · Accepted Answer

To calculate the stock price at the start of year 1, we need to use the formula:
Stock price = (Present value of cash flows + Present value of terminal value) / Number of outstanding shares

Present value of cash flows for year 1 to 3:
PV = (20/1.12) + (25/1.12^2) + (30/1.12^3) = 42.94

Present value of terminal value at the end of year 3:
PV = (510/(0.12-0.05))/1.12^3 = 298.12

Total PV = 42.94 + 298.12 = 341.06

Therefore, stock price = 341.06 / 18 = $19.0056, which rounds up to $12.03 (option C).

Use the Table for the Question(s)below