An analyst is trying to estimate the intrinsic value of the stock of Harkleroad

Question

An analyst is trying to estimate the intrinsic value of the stock of Harkleroad Technologies. The analyst estimates that Harkleroad’s free cash flow during the next year will be $25 million. The analyst also estimates that the company’s free cash flow will increase at a constant rate of 7 percent a year and that the company’s WACC is 10 percent. Harkleroad has $200 million of long-term debt and preferred stock, and 30 million outstanding shares of common stock. What is the estimated per-share price of Harkleroad Technologies’ common stock?

a.   $ 1.67

b.   $ 5.24

c.   $18.37

d.   $21.11

e.   $27.78

Explanation / Answer

Answer: D Free Cash Flow $25.00 WACC 10% Growth rate 7% Firm Value 25/(10%-7%) $833.33 million Debt $200.00 million Equity $633.33 million Per share price $21.11

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