Question
ABCs the most recent free cash flow (FCF0) is $50 million. The free cash flow is expected to grow at a rate of 30 percent,
ABCs the most recent free cash flow (FCF0) is $50 million. The free cash flow is expected to grow at a rate of 30 percent, 20 percent, and 10 percent in each of the next three years. After three years, it is expected to grow forever at a constant rate of 5 percent. The cost of common stock (rs) is 15% and the weighted average cost of capital (WACC) is 12%. ABC currently has 100 million common shares of outstanding. Kays book value of debt and preferred stock is $20 million and $30 million respectively and the book values of debt and preferred stock are very close to market value of debt and preferred stock. ABC has $10 million marketable securities (beyond normal operation) and $ 5 million of minority investment in another company. Using Excel, calculate ABCs stock price using FCF based valuation model and using Two Way Data Table of the Excel, show the sensitivity of the stock prices to the growth rate and the discount rate. (Use the first year growth rate from 20% to 40% in 2% increment and use a discount rate from 9% to 15% in 1% increment.)
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