Question

Lance Inc."s free cash flow was just $1.00 million. If the expected long-run growth rate for this company is 5.4%, if the weighted average cost of capital is 11.4%, Lance has $4 million in short-term investments and $3 million in debt, and 1 million shares outstanding, what is the intrinsic stock price?
a. $18.57
b. $18.13
c. $19.01
d. $17.28
e. $17.70

Answer 1

Answer:

a. $18.57

Explanation:

Calculation to determine the intrinsic stock price

First step is to calculate the PV of free cash flows

Using this formula

PV of free cash flows = FCF x (1+g)/ (WACC -g)

Let plug in the formula

PV of free cash flows= 1,000,000 x (1+0.054)/ (0.114-0.054)

PV of free cash flows= $17,566,666.67

Second step is to calculate the Value of equity

Using this formula

Value of equity = PV of free cash flow + short term investments - value of debt

Let plug in the formula

Value of equity=17,566,666.67 +4,000,000 -3,000,000

Value of equity=18,566,666.67

Now let calculate Intrinsic value per share

Using this formula

Intrinsic value per share = value of equity/ no. of shares

Let plug in the formula

Intrinsic value per share= 18,566,666.67 /1,000,000

Intrinsic value per share= $18.57

Therefore Intrinsic value per share is $18.57