You must estimate the intrinsic value of Noe Technologies' stock.The end-of-year free cash flow (FCF₁)is expected to be $24.50 million,and it is expected to grow at a constant rate of 7.0% a year thereafter.The company's WACC is 10.0%,it has $125.0 million of long-term debt plus preferred stock outstanding,and there are 15.0 million shares of common stock outstanding.What is the firm's estimated intrinsic value per share of common stock?

Question

Quizplus · Accepted Answer

1. Calculate the terminal value (TV) using the Gordon Growth Model:

TV = FCF / (WACC - g)

g = 7.0%
WACC = 10.0%

TV = $24.50 million / (10.0% - 7.0%) = $816.67 million

2. Calculate the present value (PV) of the FCFs and the TV:

PV = FCF1 / (1 + WACC)^1 + FCF2 / (1 + WACC)^2 + ... + FCFn / (1 + WACC)^n + TV / (1 + WACC)^n

n = 1 (since we have one year of FCFs and a perpetual growth rate thereafter)
FCF1 = $24.50 million
n = 1
TV = $816.67 million

PV = $24.50 million / (1 + 10.0%)^1 + $816.67 million / (1 + 10.0%)^1
PV = $22.27 million + $742.43 million = $764.70 million

3. Calculate the intrinsic value per share:

Intrinsic Value = (PV - Total Debt and Preferred Stock) / Number of Shares Outstanding
Total Debt and Preferred Stock = $125.0 million

Intrinsic Value = ($764.70 million - $125.0 million) / 15.0 million shares
Intrinsic Value = $39.98 per share, which is closest to option B ($46.11 per share).

You Must Estimate the Intrinsic Value of Noe Technologies' Stock