Question

Portage Bay Enterprises has $ 1$1 million in excess​ cash, no​ debt, and is expected to have free cash flow of $ 10$10 million next year. Its FCF is then expected to grow at a rate of 5 %5% per year forever. If Portage​ Bay's equity cost of capital is 13 %13% and it has 66 million shares​ outstanding, what should be the price of Portage Bay​ stock?

Answer 1

Answer:

Value of a stock =  $1.89  

Explanation:

The value of a firm is the present value of the by the free cashflow discounted at the required rate of return

Value of the firm = FCF/(WACC- g)

FCF- free cash flow

WACC- Cost of capital = 13%

g- growth rate= 5%

= 10,000/(0.13-0.05)=  125,000,000

Value of a stock = Value of firm/No of shares

                           =  $125,000,000/66,000,000 units

                          =  $1.89