Covan, Inc. is expected to have the following free cash flow:

Year

1

2

3

4

times times times

FCF

11

13 14 15 Grow by 5 %

per year

a. Covan has

7

million shares outstanding,

$4

million in excess cash, and it has no debt. If its cost of capital is

10 %

,

what should be its stock price?

b. Covan adds its FCF to cash, and has no plans to add debt. If you plan to sell Covan at the beginning of year 2, what is its expected price?

c. Assume you bought Covan stock at the beginning of year 1. What is your expected return from holding Covan stock until year 2?