Year 1 2 3 4 5 Free Cash Flow $22 million $24 million $29 million $32 million $35 million XYZ Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 2% per year. If the weighted average cost of capital is 7% and XYZ has cash of $14 million, debt of $40 million, and 78 million shares outstanding, what is General Industries' expected current share price

The expected current share price is $7.66

Explanation:

According to the given data, we have the following:

FCF1 = $22 million

FCF2 = $24 million

FCF3 = $29 million

FCF4 = $32 million

FCF5 = $35 million

Growth Rate, g = 2%

WACC = 7%

In order to calculate the expected current share price we have to calculate first the following:

First, we have to calculate the FCF6 as follows:

FCF6 = FCF5 * (1 + g)

FCF6 = $35 million * 1.02

FCF6 = $35.70 million

Next, we have to calculate the Horizon Value of Firm as follows:

Horizon Value of Firm = FCF6 / (WACC - g)

Horizon Value of Firm = $35.70 million / (0.07 - 0.02)

Horizon Value of Firm = $714 million

Next, we have to calculate the Current Value of Firm as follows:

20,560,747+20,962,529+23,672,638+24,412,646+24,954,516+509,072,132

Current Value of Firm = $22 million / 1.07 + $24 million / 1.07^2 + $29 million / 1.07^3 + $32 million / 1.07^4 + $35 million / 1.07^5 + $714 million / 1.07^5

Current Value of Firm = $623.63 million

Next, we have to calculate the Value of Equity as follows:

Value of Equity = Current Value of Firm - Value of Debt + Value of Cash

Value of Equity = $623.63 million - $40.00 million + $14.00 million

Value of Equity = $597.63 million

Therefore, the Price per share = Value of Equity / Number of shares outstanding

Price per share = $597.63 million / 78 million

Price per share = $7.66

The expected current share price is $7.66

Expected current share price = $7.66

Explanation:

Given Data:

Free Cash Flow(FCF1) = $22 million

FCF2 = $24 million

FCF3 = $29 million

FCF4 = $32 million

FCF5 = $35 million

grow rate (g) = 2%

cost of capital (r) =

XYZ cash = $14 million

XYZ debt = $40 million

Shares = 78 million

Calculating the current share price using the formula;

Share Price = Equity / No. of shares      

Before substituting into the formula, the following are calculated;

Terminal Value in year 5, P5 = FCF5 x (1 + g) / (r - g)

                                                = 35 x (1 + 2%) / (7% - 2%)

                                                = $714 million

Present Value = FCF1 / (1 + r) + FCF2 / (1 + r)^2 + FCF3 / (1 + r)^3 + FCF4 / (1 + r)^4 + (FCF5 + P5) / (1 + r)^5

=22/ (1 + 7%) +24/(1 + 7%)^2 +29/(1 + 7%)^3 +32/(1 + 7%)^4 +(35 + 714)/(1+7%)^5

= 22 / 1.07 + 24 / 1.07^2 + 29 / 1.07^3 + 32 / 1.07^4 + (749) / 1.07^5

= 20.56 + 20.96 + 23.67 + 24.41 + 534.03

= $623.63 million

Equity Value = present value + Cash - Debt

                       = 623.63 + 14 - 40

                       = $597.63 million

Calculating the current share price, we have;

Share Price = Equity / No. of shares

                     = 597.63 / 78

                     = $7.66

Therefore, the general Industries' expected current share price = $7.66

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