An analyst is trying to estimate the intrinsic value of the stock of Harkleroad
ID: 2793011 • Letter: A
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 $30 million. The analyst also estimates that the company’s free cash flow will increase at a constant rate of 7.5 percent a year and that the company’s WACC is 11 percent. Harkleroad has $225 million of long-term debt and preferred stock, and 35 million outstanding shares of common stock. What is the estimated per-share price of Harkleroad Technologies’ common stock to 2 decimal places?
Explanation / Answer
Value of operations:
= $30/(11%-7.50%)
= $857.14
Share price:
= ($857.14-$225)/35
= $18.06