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1. Pickett Inc. forecasts the free cash flows (FCFs) (in millions) shown below. The weighted average cost of capital (WACC) is 8%, and the FCFs are expected to continue growing at a 3% rate after Year 4. The firm has $90.14 million of market-value debt, but it has no preferred stock or any other outstanding claims. There are 25 million shares outstanding.
Year 1 2 3 4
FCF $10 $20 $40 $65
a. What is the value of the stock price today (Year 0)?
b. Set up a simple Excel data table where you show how the estimated intrinsic value varies as the long-run growth rate varies over the following range (2.00%, 2.25%, 2.50%, 2.75%, 3.00%, 3.25%, 3.50%, 3.75%, 4.00%, 4.25%, 4.50%, and 4.75%) - assuming everything else stays constant. When correctly set up, an Excel Data Table will automatically recalculate when input variables are changed. Refer to the Calculator Excel Tutorials folder under the Files page on the Canvas website for the Excel file and video explaining how to create data tables.
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The following information is available in general and about investments in stocks J and K.
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