Corporate value model. Assume that today is December 31, 2008, and that the lowi

Question

Corporate value model. Assume that today is December 31, 2008, and that the lowing information applies to Vermeil Airlines: - Ater-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 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 is 3 billion - 200 million shares of stock are outstanding Using the corporate value mode approach, what should be the company's stock price today?

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 = 500 + 100 - 200 - 0 =400million

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 = 400/(10%-6%) = 10,000Milion

SO Equity Value of firm = Value of firm - Debt = 10000-3000 = 7,000Million

So stock price = Equity Value/No of shares outstanding = 7000/200 = $35 per share

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---