(Hard) Dozier Corporation is a fast-growing supplier of office products. Analysts project the attached free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 7% rate. Dozier's WACC is 13%. Suppose Dozier has $100 million of debt and 10 million shares of stock outstanding. What is your estimate of the current price per share (stock price)

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The correct option is D.$42.79

Explanation:

In order to determine the current price per share of the company now,we discount all future free cash flows to present value as well as the company's terminal value:

company's terminal is the value of the company after the considered timing horizon

terminal value=free cash in year three*(1+g)/r-g

free cash flow in year three is $40 million

g is the growth rate of free cash flow which is 7%

r is the WACC of 13%

terminal value=40*(1+7%)/(13%-7%)=$ 713.33  million

Present of the company=-$20/(1+13%)+$30/(1+13%)^2+$40/(1+13%)^3+$713.33/(1+13%)^3=$ 527.89  million

The company's value of equity=present worth-debt== 527.89-100=427.89 million

share price=value of equity/number of shares== 427.89/10=$42.79

answer makes less frequent trips to the bank and firms make less frequent price changes;