Part 3 130 Points-Valuation The forecasted free cash flows for ProCom Inc., are
ID: 2602886 • Letter: P
Question
Part 3 130 Points-Valuation The forecasted free cash flows for ProCom Inc., are shown below: Free cash flow (S million) 2019 $250 $230 $260 rowth is espected to be constant after 2020. The companys beta is 1,30, the market risk prerant are unrebaed and he risk-free rate is .00%. Its balance sheet shows sis million in short-term investments that are unrelated to operations, 599 million in accounts payable, $600 million in long-term debt, and $100 million in preferred stock. The company has 60 million shares of stock outstanding. REQUIRED: What is the best estimate of the company stock's price per share?Explanation / Answer
As per CAPM
Ke = Rf + beta * Risk premium
Ke – Cost of equity
Rf – Risk free rate of return – 1 %
Risk premium – 5 %
Beta – 1.3
= 1% + 1.3 * 5%
= 6.5%
Growth rate (2019 – 2020) = (260 – 250)/250 * 100 = 4 %
Expected free cash flow in year 2020 = 260 million
Value of equity = Expected Free cash flow/ (ke - g)
= 260/ (6.5% - 4%)
= 260/2.5%
= $ 10,400 million
Price per share of equity = Value of equity/no of shares
= 10,400/60
= $ 173.333
Stock price per share = $ 173.333