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$200 million in cash and $400 million in market value of debt. The company is generating free cash flow of $100 million per year starting next year and will grow at 5% per year for the foreseeable future. If the cost of equity is 15% and the weighted average cost of capital is 10%, what is the firm’s equity value per share if they have 100 million shares outstanding?A $22/share B. $20/sharec. $18/shareD. $12/share E. $8/share F. None of the above

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Answer:

Total value of equity = Free cashflow/ke - g

                                  = $100m/0.15-0.05

                                  = $100m/0.1

                                  = $1,000m

Equity value per share = Total value of equity/No of shares outstanding

                                      = $1,000/100m shares

                                      = $10/share

The correct answer is F. None of the above.

Explanation:

The total value of equity is a function of free cashflow divided by the difference between cost of equity and growth rate. Then, we will divide the total value of equity by the number of shares outstanding so as to obtain the equity value per share.

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