Answer:
The stock's current intrinsic price is c. $18.29
Explanation:
Hi, by definition, the intrinsic value of a stock is defined by the present value of its future free cash flows, in our case, for the next year it will be $0.75 million and it will grow at a 6.4% rate, every year, "forever".
SInce there are $2 million in short term investment and $2 million in debt, both amounts cancel out each other therefore, all we have to do is to bring to present value the future free cash flows, as follows.
[tex]PresentValue=\frac{FCF(1)}{WACC-g}[/tex]
So the value of all the outstanding share of the company is:
[tex]PresentValue=\frac{750,000}{0.105-0.064} =18,292,683[/tex]
Since there are 1 million shares, each one is worth $18,292,683/1,000,000= $18.29. So the answer is c.
Best of luck.
