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Warren Corporation is expected to have the following free cash flows: Year 1 Year 2 Year 3 Year 4 Year 5 onwards FCF ($ million)
Warren Corporation is expected to have the following free cash flows: Year 1 Year 2 Year 3 Year 4 Year 5 onwards FCF ($ million) 10 15 20 25 Grow by 5% per year a. Warren has 9 million shares outstanding, $6 million in excess cash, and it has $4 million in debt. If its cost of capital is 11%, what should its stock price be? (2.5 pts) b. Warren reinvests all its FCF and has no plans to add debt or change its cash holdings. If you plan to sell Warren at the beginning of year 2, what should you expect its price to be? (2.5 pts) C. Assume you bought Warren stock at the beginning of year 1. What is your expected return from holding Warren stock until the beginning of year 2? (1 pt) Note: Show your results using 2 decimal places for (a) and (b), and 4 decimal places for (C)
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