Explore BrainMass

# Free Cash Flow and Value of Company Operations

Not what you're looking for? Search our solutions OR ask your own Custom question.

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

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.

#### 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