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    Free Cash Flow and Value of Company Operations

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    A company generated free cash flow of $21 million last year and expects it to grow at a constant rate of 3 percent indefinitely. The company's weighted average cost of capital is 11 percent. The company has 20 million shares of stock outstanding, and each share sells for $15.

    Calculate the company's free cash flow for next year.
    Calculate the value of the company's operations.
    How much would the value of operations change if expected growth is 5 percent?
    What is the value of one share of stock if growth continues at 3% a year? What is the value if growth continues at 5%?
    e. Is the stock fairly priced in the market? Explain.

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    Solution Preview

    Calculate the company's free cash flow for next year.

    The free cash flow will grow at 3% each year. The free cash flow for last year is $21 million
    Free cash flow for next year = 21 X 1.03 = $21.63 million

    Calculate the value of the company's operations.

    The value of operations is the present value of all free cash flows. For cash flows that grow at a constant rate, the
    Present ...

    Solution Summary

    The solution explains how to calculate the free cash flow and value of company operations and determine if the stock is fairly priced.

    $2.49

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