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Free Cash Flow, Value of Operations, and Value of Share

A company generated free cash flow of $51 million last year and expects it to grow at a constant rate of 4% indefinitely. The company's weighted average cost of capital is 12%. The company has 25 million shares of outstanding stock, and the current price per share is $28.50.

Could you please do a step-by step (equation) process for each problem for learning purposes.

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

Calculate the value of the company's operations.

Calculate the value of one share of the company's stock.

Is the company's stock a good buy? Explain?

Solution Preview

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

We are given that the free cash flows (FCF) are growing at a constant rate of 4%. This implies that the FCF would increase by 4% each year. We are given the current FCF. The FCF next year would be higher by 4%
Next year FCF (FCF 1) = Current FCF (FCF0) X (1+ rate)
FCF1 = 51 X (1+4%) = $53.04 million

Calculate the value of the ...

Solution Summary

The solution explains the calculation of free cash flow, value of operations and the value of share of stock

$2.19