Question
The price of WatchBits stock is 45. ABC Investment Bank attempts to determine whether WatchBit is fairly priced. The financial information ABC has assembled for
The price of WatchBits stock is 45. ABC Investment Bank attempts to determine whether WatchBit is fairly priced. The financial information ABC has assembled for this valuation is as follows: The required rates of return on WatchBit debt, common stock and preferred stock are 7%, 12% and 8%, respectively. The target capital structure is: 30% debt, 15% preferred stock, and 55% common stock. The market value of debt is 145 million. The market value of preferred stock is 65million. The Free Cash Flow to the Firm (FCFF) for the year just ended is 28 million and is expected to grow at a constant rate equal to 5% for the years that follow. WatchBit has 8 million outstanding shares. The tax rate is 30%.Calculate the estimated value per share for WatchBit stock and decide whether it is underpriced or overpriced.
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