Question
You are considering an investment in a small enterprise software company called Guzman Hall, Inc., a publicly traded corporation with a current market price of
You are considering an investment in a small enterprise software company called Guzman Hall, Inc., a publicly traded corporation with a current market price of $10 per share and one million shares outstanding. Your investment horizon is five years. Assume that you have determined that Guzman Halls current free cash flow this year is $20 million and that you estimate that its cash flow is increasing by 5% per year. You assume the terminal value of its free cash flow to be three times the value of the fifth year. Your required rate of return, or discount rate, is 10%. Based on your results, what would you be willing to pay for a share of stock in Guzman? In light of your investment expectations, is Guzman overvalued or undervalued at its current market price? Be sure to show your work.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started