# Free Cash Flow and Value of Company Operations

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.