Question 2. DCF Analysis (2 Points)

Assume that Kims Inc. has the following expected future free cash flows (FFCFs). Year 1 2 3 4 5 Terminal FFCF 500,000 800,000 1,200,000 1,700,000 2,400,000 14,000,000 Kims Inc. currently has $2 million cash and $700,000 debt. It also has 2 million shares outstanding, and the stock is currently traded at $2. Assume discount rate of 0.25.

a) Calculate the intrinsic stock price of Kims Inc using the DCF analysis.

b) Discuss whether you will buy Kims stock or not, and discuss the necessary condition for the price convergence to occur.

Page of 4 ZOOM Question 2. DCF Analysis (2 points) Assume that Kim's Inc. has the following expected future free cash flows (FFCFS). 3 4 Year FFCF 1 2 5 Terminal 500,000 800,000 1,200,000 1,700,000 2,400,000 14,000,000 Kim's Inc. currently has $2 million cash and $700,000 debt. It also has 2 million shares outstanding, and the stock is currently traded at $2. Assumc discount rate of 0.25. a) Calculate the intrinsic stock price of Kim's Inc using the DCF analysis. b) Discuss whether you will buy Kim's stock or not, and discuss the necessary condition for the price convergence to occur