Question
A stock market analyst is evaluating the common stock of Keane Investment. She estimates that the company's operating income (EBIT) for the next year will
A stock market analyst is evaluating the common stock of Keane Investment. She estimates that the company's operating income (EBIT) for the next year will be $800 million. Furthermore, she predicts that Keane Investment will require $255 million in gross capital expenditures (gross expenditures represent capital expenditures before deducting depreciation) next year. In addition, next year's depreciation expense will be $75 million, and no changes in net operating working capital are expected. Free cash flow is expected to grow at a constant annual rate of 6 percent a year. The company's WACC is 9 percent, its cost of equity is 14 percent, and its before-tax cost of debt is 7 percent. The company has $900 million of debt, $500 million of preferred stock, and has 200 million outstanding shares of common stock. The firm's tax rate is 40 percent. Using the free cash flow valuation method, what is the predicted price of the stock today?
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