Please answer the following questions and show work. (Stocks, Cost of Capita & C
ID: 2726467 • Letter: P
Question
Please answer the following questions and show work. (Stocks, Cost of Capita & Capital Budgeting)
5. You must estimate the intrinsic value of Gallovits Technologies’ stock. Gallovits’s end-of-year free cash flow (FCF) is
expected to be $25 million, and it is expected to grow at a constant rate of 8.5% a year thereafter. The company’s WACC is
11%. Gallovits has $200 million of long-term debt plus preferred stock, and there are 30 million shares of common stock
outstanding. What is Gallovits' estimated intrinsic value per share of common stock?
a. $22.67
b. $24.00
c. $25.33
d. $26.67
Explanation / Answer
Value of operations = Free cash flows1÷( Capitalization Rate- growth rate )
= $25,000,000÷(11% - 8.5%)
= $1,000,000,000
Value per share:
= ($1,000,000,000-$200,000,000)÷30,000,000
= $26.67