Use the information for the question(s)below.
You expect CCM Corporation to generate the following free cash flows over the next five years: Following year five,you estimate that CCM's free cash flows will grow at 5% per year and that CCM's weighted average cost of capital is 13%.
-If CCM has $200 million of debt and 8 million shares of stock outstanding,then the share price for CCM is closest to:
A)$49.50.
B)$12.50.
C)$19.35.
D)$24.50.

Question

Use the information for the question(s)below.
You expect CCM Corporation to generate the following free cash flows over the next five years:  Following year five,you estimate that CCM's free cash flows will grow at 5% per year and that CCM's weighted average cost of capital is 13%.
-If CCM has $200 million of debt and 8 million shares of stock outstanding,then the share price for CCM is closest to:
A)$49.50. 
B)$12.50. 
C)$19.35. 
D)$24.50.

Quizplus · Accepted Answer

1. First we need to calculate the present value of the free cash flows for the next five years using the formula: 
PV = (FCF1 / (1 + WACC)^1) + (FCF2 / (1 + WACC)^2) + (FCF3 / (1 + WACC)^3) + (FCF4 / (1 + WACC)^4) + (FCF5 / (1 + WACC)^5)
Where FCF is the free cash flow for each year, WACC is the weighted average cost of capital, and PV is the present value.
Plugging in the numbers, we get:
PV = (20 / 1.13^1) + (22 / 1.13^2) + (24 / 1.13^3) + (26 / 1.13^4) + (28 / 1.13^5) = 91.78 million

2. Next, we need to calculate the terminal value of the company using the formula:
Terminal Value = FCF5 * (1 + Expected Growth Rate) / (WACC - Expected Growth Rate)
Plugging in the numbers, we get:
Terminal Value = 28 * (1 + 0.05) / (0.13 - 0.05) = 304 million

3. Now we can calculate the total enterprise value of the company by adding the present value of the free cash flows to the terminal value and subtracting the total debt:
Enterprise Value = PV + Terminal Value - Debt
Enterprise Value = 91.78 + 304 - 200 = 195.78 million

4. Finally, we can calculate the share price by dividing the enterprise value by the number of shares outstanding:
Share Price = Enterprise Value / Shares Outstanding
Share Price = 195.78 / 8 = $24.47, which is closest to answer choice D.

Use the Information for the Question(s)below