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Stock price

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.

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 ...

Solution Summary

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

$2.19