The complete question is:
Acme Medical Corp. is expecting the cash flows from 2018-2022 in the table below. After 2022 it is expecting growth in cash flow at an annual rate of 3%. The firm has determined that its weighted average cost of capital (discount rate) is 7%. Using the table below calculate the following:
Year Cash flow
2018 500,000
2019 550,000
2020 620,000
2021 700,000
2022 800,00
Answer: Share value = $36.23
Explanation:
First of all we need to calculate the present value of future cash flows of the company
Weighted average cost of capital is given as 7% so discounts will be made against 1.07
Present value = 500,000/(1+0.07) + 550,000/(1+0.07)^2 + 620,000/(1+0.07)^3 +700,000 /(1+0.07)^4 + 800,000/(1+0.07)^5 + [(824,000/0.04)/(0.07)^5]
Present value =$17,245,716.59
Share value will be present value of future cash flows minus market value of the company, and divided by number of shares
Share value = (17,245,716.59 - 10,000,000) ÷ 200,000
Share value = $7,245,716.59 ÷ 200,000
Share value = $36.23
