Question
26. Analysts have estimated that XYZ Inc. will generate free cash flows (FCF) of $2 million, $2.5 million, and $2.75 million over the next three
26.
Analysts have estimated that XYZ Inc. will generate free cash flows (FCF) of $2 million, $2.5 million, and $2.75 million over the next three years, following which they believe that XYZs free cash flows will grow at an average annual rate of 3% for an indefinite period of time. If XYZs cost of equity capital is 11%, it has 2 million common shares outstanding, and its current share price is $16.50. Based on these estimates, which of the following statements is correct?
1. | XYZs common shares are currently overpriced | |
2. | Based on the information provided, it is not possible to determine the intrinsic value of XYZs common shares | |
3. | XYZs common shares are currently correctly priced | |
4. | XYZs common shares are currently underpriced |
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