Question #85
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 40
Status: Unattempted
Part of Context Group: Q85-86
First in Group
Shared Context
Question
If the estimated value of the free cash to the firm (FCFF) for year 0 is $2.4 million, the value per share of BIC stock, based on the stable growth model, is closest to:
Answer Choices:
A. $39
B. $55
C. $61
Explanation
FCFE = FCFF – Interest expense × (1 − tax rate) + Net borrowing = $2.40 million – [$2.00
million × (1 − 0.40)] + $3.30 million − $2.85 million = $1.65 million.
The value of equity is: [$1.65 million × (1+0.10) ] /(0.16 − 0.10) = $30.25 million.
On a per share basis: $30.25 million/500,000 = $60.50