Assume that today is December 31, 2012, and that the following information appli

Question

Assume that today is December 31, 2012, and that the following information applies to Vermeil Airlines: ? After-tax operating income [EBIT(1 - T)] for 2013 is expected to be $550 million. ? The depreciation expense for 2013 is expected to be $180 million. ? The capital expenditures for 2012 are expected to be $325 million. ? No change is expected in net operating working capital. ? 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 $6 billion. ? 210 million shares of stock are outstanding. Using the corporate valuation model approach, what should be the company's stock price today? Round your answer to the nearest cent. Write out your answer completely. For example, 0.00013 million should be entered as 130.

Explanation / Answer

OFCF = EBIT(1-T) + depreciation - CAPEX - working capital - any other assets
Where:
EBIT = earnings before interest and taxes
T= tax rate
CAPEX = capital expenditure
So OFCF = 550 + 180 - 325 - 0 =405million

Value of the firm = SOFCF1/(WACC-g)

Where:OFCF1 = operating free cash flow

WACC = discount rate (in this case WACC)=10%

g = expected growth rate in OFCF=6%

So Value of Firm = 405/(10%-6%) = 10,125Milion

SO Equity Value of firm = Value of firm - Debt = 10125-6000 = 4125Million

So stock price = Equity Value/No of shares outstanding = 4125/210 = $19.64 ie $20 per share

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