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Net advantage to leasing & Valuing stocks of a company

Question . The last free cash flow for a company was $51 million and it is expected it to grow at a constant rate of 4 percent indefinitely. The company's weighted average cost of capital is 12 percent. The company has 25 million shares of outstanding stock, and the current price per share is $28.50.
a. Calculate the company's free cash flow for next year.
b. Calculate the value of the company's operations.
c. Calculate the value of one share of the company's stock.
d. Is the company's stock a good buy? Explain?

Question . Andiola Corporation is evaluating whether to lease or purchase equipment. Its tax rate is 30 percent. If the company purchases the equipment for $1,000,000 it will depreciate it over 5 years, using straight-line depreciation. If the company enters into a 5-year lease, the lease payment is $200,000 per year, payable at the beginning of each year. If the company purchases the equipment it will borrow from its bank at an interest rate of 11 percent.
a. Calculate the cost of purchasing the equipment.
b. Calculate the cost of leasing the equipment.
c. Calculate the net advantage to leasing. Should the company purchase or lease the equipment?

Solution Preview

See the attached file. Thanks

Problem 1
Question .  The last free cash flow  for a company was $51 million and it is expected it to grow at a constant rate of 4 percent indefinitely.   The company's weighted average cost of capital is 12 percent.  The company has 25 million shares of outstanding stock, and the current price per share is $28.50. 
a. Calculate the company's free cash flow for next year. 
FCF0 $51.00 million
g=Growth rate 4%
FCF1=FCF0*(1+g) $53.04 million

b. Calculate the value of the company's operations. 
r=WACC 12%
V=Value of company operations=FCF1/(r-g)
V= $663.00 million

c. Calculate the value of one share of the company's stock. 
N=No of shares outstanding 25 million
P=Value of one share = V/N
P= $26.52

d. Is the company's stock a good buy?  Explain? 
No. The market price of the shares is higher than the intrinsic value of the stock. So stock is a Sell ...

Solution Summary

This post solves two problems. In first problem it shows how to calculate the value of stocks of the company using free cash flow method. In the second problem it shows how to calculate the net advantage to leasing.

$2.19