Question

Hofmann Enterprises invests a lot of money in R&D, and as a result it retains and reinvests all of its earnings instead of paying dividends. A pension fund manager is interested in purchasing Hofmann’s stock and has estimated its free cash flows for the next 3 years as follows: $4 million, $7 million, and $12 million. After the 3rd year, FCF is projected to grow at a constant 8 percent. Hofmann’s WACC is 13 percent, its debt and preferred stock total $50 million, and it has 4 million shares of common stock outstanding. What is the value of Hofmann’s stock price?

	a.	$31.58
	b.	$49.24
	c.	$44.08
	d.	$36.74
	e.	$56.63

Answer 1

Cash flows 13% Present value Year pv $4.00 $3.54 1 0.8850 $7.00 $5.48 2 0.7831 $12.00 $8.32 0.6931 value at year 3 (12 1.08)/(0.13-0.08) $259.20 $179.64 0.6931 $196.98 Current share price $196.98 Current value of the firm $50.00 less: Debt $146.98 common stock Share price = $36.74 per share 146.98/4]