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You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value
You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow (FCF) is expected to be $70.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the future, the company has $200 million of long-term debt and preferred stock, and it has 30 million shares of common stock outstanding. Assume the firm has zero non-operating assets. What is the firm's estimated intrinsic value per share of common stock? Do not round intermediate calculations. a $36.80 o b. 534.40 ?? c. $49.60 d. $40.00 e. $48.80
Expert Solution
The correct option is D i.e $40.
Working:
Value of firm = Expected FCF / (WACC - Growth rate)
= $70 / (0.10 - 0.05)
= $70 / 0.05
= $1,400 milion
Value of equity = Value of firm - Value of debt and preferred stock
= $1,400 - $200
= $1,200 million
Intrinsic value = Value of equity / Number of outstanding shares
= $1,200 million / 30 million
= $40
Thus, firm's estimated intrinsic value per share = $40.
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