Assume that today is December 31, 2012, and that the following information appli
ID: 2706734 • Letter: A
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 $700 million.
The depreciation expense for 2013 is expected to be $90 million.
The capital expenditures for 2012 are expected to be $450 million.
No change is expected in net operating working capital.
The free cash flow is expected to grow at a constant rate of 7% per year.
The required return on equity is 16%.
The WACC is 10%.
The market value of the company's debt is $4 billion.
180 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
FCF =EBIT(1-T)+Depreciation -Capital Expenditure-change in Net working Capital
FCF =$700,000,000+$90,000,000-$450,000,000=$340,000,000
Firm Value =FCF/(WACC-g) =$340,000,000/(0.10-0.07)=$11333333333
the market value of its equity is
MVtotal =MVequity+MVdebt
$11333333333=MVequity+$4,000,000,000
MVequity =$7333333333
Price per share =$7333333333/180,000,000 =$40.74