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TRX Corporation is expected to generate free cash flows (FCF) of $6
TRX Corporation is expected to generate free cash flows (FCF) of $6.7 million in year 1, $9.99 million in year 2, $12.06 million in year 3, and $14.81 million in year 4. After then, the FCF will grow by 3% per year. TRX has 10 million shares outstanding, $4 million in excess cash, and it has $1 million in debt. If its cost of capital is 6%, the stock price would be $________? Input your answer without the $ sign and round your answer to two decimal places.
Expert Solution
Firm Value= Present Value of future free cash flow discounted at cost of capital (6%)
Present Value of FCF of Year 1=6.7/1.06=$6.320755million
Present Value of FCF of Year 2=9.99/(1.06^2)=$8.810965 million
Present Value of FCF of Year 3=12.06/(1.06^3)=$10.125809 million
Present Value of FCF of Year 4=14.81/(1.06^4)=$11.730907 million
FCFGrowth after Year 4 =3%
FCF in Year 5 =14.81*1.03=$15.2543 million
Horizon Value at year4=15.2543/(0.06-0.03)=$508.476667 million
Present Value today of horizon value=508.476667/(1.06^4)=$402.761146 million
Firm Value=Present Value of future Free Cash flows=6.320755+8.810965+10.125809+11.730907+402.761146=$439.749581 million
Firm Value+Cash=Equity+Debt
439.749581+4=Equity Value+1
Equity Value=439.749581+3=$442.749581million
Number of shares outstanding=10 million
The stock price would be $442.749581/10=$44.27
Answer: 44.27
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