Suppose next year’s projected sales equal $10 million, costs of goods sold are 6

Question

Suppose next year’s projected sales equal $10 million, costs of goods sold are 60% of sales, S&A expenses and depreciation are $1 million each, interest expense is $0.5 million, and the tax rate is 35%. Ignore net working capital and capital expenditures. Assume that free cash flows are projected to grow forever at 3% and that the cost of capital is 8%. Suppose the firm in question has $10 million in cash and $12 million in debt. Suppose it also has 5 million shares outstanding and a price per share of $5. Given this information, the $5 price is
a. Too high
b. Too low
c. Just right
d. The concepts in questions 15 and 16 are unrelated.

Explanation / Answer

c. Just right

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