Use the table for the question(s) below. FCF Forecast ($ million)
Banco Industries expect 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 11%, $50 million in cash, $80 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?
A) $6.52
B) $11.74
C) $13.04
D) $23.48

Question

Use the table for the question(s) below. FCF Forecast ($ million)
 Banco Industries expect 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 11%, $50 million in cash, $80 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?
A) $6.52 
B) $11.74 
C) $13.04 
D) $23.48

Quizplus · Accepted Answer

C) FCF₅ = $18.65 million × (1 + 0.05) = $19.5825 million; V₄ = $19.5825 million / (0.11 - 0.05) = $326.38 million; using a financial calculator, V₀ = $264.7655 million; P₀ = ($264.7655 million + 50 - 80) / 18 million = $13.04

Use the Table for the Question(s) Below