Year 1 2 3 4 5
Free Cash Flow $22 million $26 million $29 million $30 million $32 million

General Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 9% and General Industries has cash of $15 million, debt of $45 million, and 80 million shares outstanding, what is General Industries' expected current share price?

Question

Year	1 	2 	3	4	5
Free Cash Flow	$22 million	$26 million	$29 million 	$30 million	$32 million

General Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 9% and General Industries has cash of $15 million, debt of $45 million, and 80 million shares outstanding, what is General Industries' expected current share price?

BlackTom AI · Accepted Answer

The problem provides expected Free Cash Flows (FCF) for years 1 through 5 and then assumes a perpetual growth rate of 5% thereafter. From the data: FCF1 = 22, FCF2 = 26, FCF3 = 29, FCF4 = 30, FCF5 = 32 (all in millions). The firm’s cost of capital (WACC) is 9%, and the firm has cash = 15, debt = 45, and 80 million shares outstanding.

Step 1: Value the free cash flows for the explicit forecast period (years 1–5).
- Present value factor for year 1: 1 / 1.09 ≈ 0.9174; PV(FCF1) ≈ 22 × 0.9174 ≈ 20.18
- Year 2: 1 / 1.09^2 ≈ 0.8417; PV(FCF2) ≈ 26 × 0.8417 ≈ 21.87
- Year 3: 1 / 1.09^3 ≈ 0.7722; PV(FCF3) ≈ 29 × 0.7722 ≈ 22.39
- Year 4: 1 / 1.09^4 ≈ 0.7084; PV(FCF4) ≈ 30 × 0.7084 ≈ 21.25
- Year 5: 1 / 1.09^5 ≈ 0.6503; PV(FCF5) ≈ 32 × 0.6503 ≈ 20.81
Sum of PV(FCF1–5) ≈ 20.18 + 21.87 + 22.39 + 21.25 + 20.81 ≈ 106.5 million.

Step 2: Compute the terminal value at year 5, using the perpetual growth model after year 5.
- FCF6 = FCF5 × (1 + g) = 32 × 1.05 = 33.6 million.
- Terminal value at end of year 5: TV5 = FCF6 / (WACC − g) = 33.6 / (0.09 − 0.05) = 33.6 / 0.04 = 840 million.
- Present value of TV5: PV(TV5) = TV5 / (1.09)^5 ≈ 840 / 1.5387 ≈ 546 million.

Step 3: Determine the total equity value of the firm.
- Enterprise value from explicit forecast and terminal value: PV(FCF1–5) + PV(TV5) ≈ 106.5 + 546 ≈ 652.5 million.
- Net equity value: Equity = Enterprise Value + Cash − Debt ≈ 652.5 + 15 − 45 ≈ 622.5 million.

Step 4: Compute the per-share price.
- Price per share = Equity Value / Shares Outstanding ≈ 622.5 / 80 ≈ 7.78.

This aligns with the given option for the per-share price once all components are included, including the terminal value reflecting perpetual growth after year 5. The calculation carefully combines the present value of the explicit FCFs, the terminal value, and the balance sheet adjustments (cash and debt) to arrive at the equity value, which is then divided by the number of shares outstanding to yield the current share price estimate.

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