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Portage Bay Enterprises has $1 million in excess​ cash, no​ debt, and is expected to have free cash flow of $11 million next year. Its FCF is then expected to grow at a rate of 5% per year forever. If Portage​ Bay's equity cost of capital is 10% and it has 4 million shares​ outstanding, what should be the price of Portage Bay​ stock?

Respuesta :

Answer:

=$55.25

Explanation:

Value of Equity= FCF / (k - g)

value of equity=$11/(10%-5%)=$220  million

total value of the firm(all equity)=value of equity+cash

value of equity=$220 million+$1 million

share price value=value of total equity/shares outstanding

share price value=$221 million/4 million=$55.25

Alternatively:

Value of equity=$11/(1+10%)^1+$11*(1+5%)/(10%-5%)/(1+10%)^1=$220 million

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