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Fauji Fertilizer Corporation expects to generate following free cashflows in coming 5 years
Fauji Fertilizer Corporation expects to generate following free cashflows in coming 5 years.
Year FCF (Rs. Million)
1 51
2 70
3 77
4 72
5 80
After this time period, the free cashflows will grow constantly at 3% per year. The firm's cost of capital is 13%. Using the discounted free cashflow model, calculate the following.
a. What is the enterprise value of Fauji Fertilizer Ltd?
b. If Fauji Fertilizer have access cash of Rs. 32 million, debt of Rs. 280 million, and the 40 million shares outstanding and trading in the market, what should be the expected share price of Fauji Fertilizer?
c. Suppose that the stocks of Fauji Fertilizer are being sold in the market at Rs. 12 per share. Will you buy that stock? why or why not?
Expert Solution
a). Enterprise value = Rs. 688.13 million
b). Expected share price = Rs. 11.00 per share
c). We should not buy the stock because the market value of stock (Rs. 12) is higher than the fair value of stock so the stock is overpriced.
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