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River Enterprises has $503 million in debt and 18 million shares of equity outstanding. Its excess...

River Enterprises has $503 million in debt and 18 million shares of equity outstanding. Its excess cash reserves are $14 million. They are expected to generate $194 million in free cash flows next year with a growth rate of 2% per year in perpetuity. River Enterprises' cost of equity Capital is 11%. After analyzing the company, you believe that growth rate should be 3% instead of 2%. How much higher (in dollars) would the price per share be if you are right?

If the growth rate is 2%, the price share is $___. (Round to the nearest cent)

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Answer #1

Growth rate is 2%

share price = [(free cash flow / (cost of capital - growth rate)) - debt + cash] / shares outstanding

share price = [($194,000,000 / (11% - 2%)) - $503,000,000 + $14,000,000] / 18,000,000

share price = $92.59

Growth rate is 3%

share price = [(free cash flow / (cost of capital - growth rate)) - debt + cash] / shares outstanding

share price = [($194,000,000 / (11% - 3%)) - $503,000,000 + $14,000,000] / 18,000,000

share price = $107.56

Difference in share price = $107.56 - $92.59 = $14.97

If the growth rate is 3%, the share price is higher by $14.97

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