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Assume that today is December 31, 2008, and that the following information applies to Vermeil Airlines:

â?¢ After tax operating income [EBIT (1 â?"T)] for 2009 is expected to be $500 million.

â?¢ The depreciation expense for 2009 is expected to be $100 million.

â?¢ The capital expenditures for 2009 are expected to be $200 million.

â?¢ No change is expected in net working capital.

â?¢ The free cash flow is expected to grow at a constant rate of 6% per year.

â?¢ The required return on equity is 14%.

â?¢ The WACC is 10%.

â?¢ The market value of the companyâ??s debt is $3 billion.

â?¢ 200 million shares of stock are outstanding.

Using the corporate valuation model approach, what should be the companyâ??s stock price today? Please show all work.

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Solution Summary

The solution explains how to calculate the stock price using the corporate valuation model

Solution Preview

The price of stock = Value of Equity/Number of shares
Value of equity = Value of firm - value of debt
Value of firm is the present value of free cash flows. Since the free cash flows grow at a constant rate, we use the ...

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