A company is forecasted to generate free cash flows of $25 million next year and $29 million the year after. After that, cash flows are projected to grow at a stable rate in perpetuity. The company's cost of capital is 12.0%. The company has $34 million in debt, $19 million of cash, and 23 million shares outstanding. Using an exit multiple for the company's free cash flows (EV/FCFF) of 17, what's your estimate of the company's stock price

$18.41

Explanation:

Equity value = FCF next year / (1 + cost of capital) + FCF in year 2 / (1 + cost of capital)^2 + 1 / (1 + cost of capital)^2 * [ (FCF in year 2 * exit multiple)]

= $25 million/1.12 + $29 million/1.12^2 + 1 / 1.12^2*[($29 million*17)]

= $25 million/1.12 + $29 million/1.12^2 + $493 million/1.12^2

= $25 million / 1.12 + $522 million / 1.12^2

= $438.4566327 million

The stock price = ($438.4566327 million - Debt + Cash) / Number of shares outstanding

= ($438.4566327 million - $34 million + $19 million) / 23 million shares

= $423.4566327 million / 23 million shares

= 18.4111579435

= $18.41

answer; i believe the correct answer is (business necessity defense;