Question

Assume that today is December 31, 2019, and that the following information applies to Abner Airlines:

After-tax operating income [EBIT(1 - T)] for 2020 is expected to be $450 million.
The depreciation expense for 2020 is expected to be $140 million.
The capital expenditures for 2020 are expected to be $350 million.
No change is expected in net operating working capital.
The free cash flow is expected to grow at a constant rate of 4% per year.
The required return on equity is 13%.
The WACC is 9%.
The firm has $205 million of non-operating assets.
The market value of the company's debt is $3.103 billion.
60 million shares of stock are outstanding.

Using the corporate valuation model approach, what should be the company's stock price today? Do not round intermediate calculations. Round your answer to the nearest cent.

$   

Answer 1

EBIT(1-T) = $450 million

Add: Depreciation Expense (non-cash) = $140 million

Less: Capital Expenditure = $350 million

Free cash flow = $240 million

Present value of free cash flows = Expected Free cash flow next year/(WACC – growth rate)

= 240 million/(9%-4%)

= $4,800 million

Add: Non-operating assets = $205 million

Less: Value of debt = $3103 million

Value of Equity = $1902 million

Number of shares = 60 million

Price per share = $31.7