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I. Question 1 ( Free Cash Flow Approach, past exam question ) Green Planet, Inc., a manufacturer of air filter systems for industrial facilities, is
I. Question Free Cash Flow Approach, past exam question
Green Planet, Inc., a manufacturer of air filter systems for industrial facilities, is considering
the addition of a new system to its current product line. The following data has been
forecasted:
The market value of the firm's debt is $ and it has $ in marketable securities
The company also has shares of preferred stock that pay an annual dividend of $
per share. Investors require a rate of return of on preferred stocks of similar risk. The firm
has shares of common stock outstanding, and its weighted average cost of capital is
The expected tax rate is in the next two years and after that.
a Calculate the free cash flow for each of the next four years.
b After the firm's free cash flow is expected to grow at per year indefinitely.
What is the value of the stock today?
c Assume that after the firm's free cash flow is expected to grow at per year
for four years. After that time, the firm's free cash flow will grow at indefinitely.
Using the twostage dividend growth model, what is the value of the stock?
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