Carlyle Inc. forecasts the free cash flows (in millions) shown below. If the wei

Question

1. Carlyle Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 10% and the free cash flows are expected to continue growing at 4% after year 3 what is the time zero value of operations, in millions? The balance sheet shows $20 million of short-term investments that are unrelated to operations, $50 million of accounts payable, $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity. The company has 10 million shares of stock outstanding. What is the best estimate of the stock

Explanation / Answer

growth rate = 45/42 -1 =7.14 %

terminal value at year 2 = 45/(0.1 -0.0714) =1573

value of operations = -20 /(1.1) +.(42+1573)/(1.1)^2 = 1317

MV equity =1327 - 120 -40 =1167

stock price = 1167/10 = 116.7

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