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You are considering buying common stock in Grow On, Inc. You have calculated that the firm's...

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Finance

You are considering buying common stock in Grow On, Inc. Youhave calculated that the firm's free cash flow was $5.90 millionlast year. You project that free cash flow will grow at a rate of8.0% per year indefinitely. The firm currently has outstanding debtand preferred stock with a total market value of $10.20 million.The firm has 1.79 million shares of common stock outstanding. Ifthe firm's cost of capital is 23.0%, what is the most you shouldpay per share for the stock now?

Answer & Explanation Solved by verified expert
3.8 Ratings (735 Votes)

Per share stock value today is $18.03

Step-1:Calculation of value of firm
As per discounted cash flow method, value of firm is the present value of cash flow from bond.
Present value of cash flow = FCF0*(1+g)/(K-g) Where,
= 5.90*(1+0.08)/(0.23-0.08) FCF0 Free cash flow of last year $       5.90 million
= $    42.48 million g Growth rate 8%
k Cost of capital 23%
Step-2:Calculation of value of common shares
million
Value of firm $    42.48
Less value of debt and preferred stock $    10.20
Value of shares of common stocks $    32.28
Step-3:Calculation of per share value
Per share value = Value of shares of common stock / Number of common shares
= $    32.28 million / 1.79 million
= $    18.03

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Transcribed Image Text

You are considering buying common stock in Grow On, Inc. Youhave calculated that the firm's free cash flow was $5.90 millionlast year. You project that free cash flow will grow at a rate of8.0% per year indefinitely. The firm currently has outstanding debtand preferred stock with a total market value of $10.20 million.The firm has 1.79 million shares of common stock outstanding. Ifthe firm's cost of capital is 23.0%, what is the most you shouldpay per share for the stock now?

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