Question

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QUESTION 26 Jones & Sons expects to generate free cash of $20 million during the upcoming year and to experience constant growth of 5% in the future. The WACC is 11% If the firm has 10 million shares outstanding, what is the estimated price per share? 510 51033 $3333 $83.33 Click Save and Submit to m e and submit. Click Save All Answers to see allan DOLL username zgroulle password: Sttoorseste Byu Dvorarkis Vaho

Answer 1

The Correct Answer is $33.33

Step 1 - Calculation of Value of Jones & Sons under constant growth model

= Free Cash Flow for year 1 / (WACC - Growth rate)

Free Cash Flow for year 1 can also be written as FCFF₁.

Free Cash Flow for year 1 = $20 million. It is to be noted that it is not FCFF₀ or FCFF of current year since the question states that Jones & Sons expects to generate $20 million in the upcoming year which means the next year of FCFF₁​​​​​.​​

WACC or Weighted Average Cost of Capital = 11%

Growth rate = 5%

Therefore Value of Jones & Sons

= 20 / (11% - 5%)

= 20 / 6%

= $333.3333 million

Step 2 - Calculation of estimated price per share

Price per share = Value of firm / Number of shares outstanding

= $333.3333 million / 10 million

= $33.33 (Rounded two decimal places)