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Assume you have a company that has $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?

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ahmedgodtrust

Answer:

Total value of equity = Free cashflow

                                       Ke - g

                                   = $100m/0.15-0.05

                                   = $1,000m

Equity per share = $1,000/100m shares

                            = $10/share

Explanation: In this case, we need to calculate the Total value of equity by dividing the free cashflow by the difference between cost of equity and growth rate.  Thereafter, we will divide the total value of equity by the number of shares outstanding in order to obtain the equity value per share.

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