Assume that today is December 31, 2008, and the following information applies to
ID: 2668986 • Letter: A
Question
Assume that today is December 31, 2008, and the following information applies to Vermeil Airlines:After-tax operating income [EBIT(1 - T)] for 2009 is expected to be $500 million.
The depreciation expense for 2009 is expected to be $100 million.
The capital expenditures for 2009 are expected to be $200 million.
No change is expected in net operating working capital.
Assume that all cash flows are paid and received at the end of the year.
The free cash flow is expected to grow at a constant rate of 6% per year.
The required return on equity is 14%.
The WACC is 10%.
The market value of the company's debt is $3 billion.
200 million shares of stock are outstanding.
Using the corporate valuation model approach, what should the company's stock price be today? Round your answer to two decimal places.
Explanation / Answer
Free cashflows = EBIT +Depreciation - Capital expenditure - Net working capital = $500 + $100 - $200 - 0 = $400 million (or) $400,000,000 Firm value = Free cashflows/(WACC - Growth rate) = $400,000,000/(0.1 - 0.06) = $400,000,000/0.04 = $10,000,000,000 Firm value = Market value of debt + Market value of equity $10,000,000,000 = Market value of equity + $3,000,000,000 Market value of eqity = $7,000,000,000 Stok price of the company is = Marekt value of equity/No.shares outstanding = $7,000,000,000/200,000,000 = $35 Therefore the stock price is $35