Question

Decker Tires' free cash flow was just FCF0 = $1.32. Analysts expect the company's free cash flow to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The WACC for this company 9.00%. Decker has $4 million in short-term investments and $14 million in debt and 1 million shares outstanding. What is the best estimate of the stock's current intrinsic price?a. $31.59b. $32.65c. $33.75d. $34.87e. $35.99

Answer 1

Answer:

d. $34.87

Explanation:

We need to calcualte the value of the company. This is done by addingthe present vbalue of the future free cash flow of the firm.

FCF0 = 1.32 (current accounting period)

FCF 1.32 + 30% = 1.716

FCF2 FCF1 + 10% = 1.716 x 1.1 = 1.8876‬

FCF3 FCF + 5% = 1.8876 x 1.05 =  1.98198‬

From here after we use the gordon model:

$\frac{divends}{return-growth} = Intrinsic \: Value$

WACC = 9%

grow = 5%

we use FCF instead of dividends: 1.98198

$\frac{1.98198}{0.09-0.05} = Intrinsic \: Value$

Value of the future cash flow 49,5495

Now, as this are in the future we must adjust using the present value of a lump sum:

$\frac{1.716}{(1 + 0.09)^{1} } = PV$  

PV   1.5743

$\frac{1.8876}{(1 + 0.09)^{2} } = PV$  

PV   1.5888

$\frac{49.5495}{(1 + 0.09)^{2} } = PV$  

PV   41.7048

Total: 1.5743 + 1.5888 + 41.7048 = 44,8679‬

Now we adjust for shrot term investment and debt outstanding:

vresent value of the future cash flow 44,8679‬

short term investment:                          4.0000

debt outstanding                                   (14.000)  

Net:                                                        34.8679