Riener Inc. forecasts the free cash flows (FCFs) (in millions) shown below. The weighted average cost of capital (WACC) is 9%, and the FCFs are expected to continue growing at a 4% rate after Year 3. The firm has $213.20 million of market-value debt, but it has no preferred stock or any other outstanding claims. There are 80 million shares outstanding. Year 1 2 3 FCF $50 $75 $125 What is the estimated stock price today (Year 0)? 2. 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 (3.00%, 3.25%, 3.50%, 3.75%, 4.00%, 4.25%, 4.50%, 4.75%, 5.00%, 5.25%, 5.50%, and 5.75%) – assuming everything else stays constant
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Riener Inc.
Year 1 2 3
FCF $50 $75 $125
- What is the estimated stock price today (Year 0)?
2. 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 (3.00%, 3.25%, 3.50%, 3.75%, 4.00%, 4.25%, 4.50%, 4.75%, 5.00%, 5.25%, 5.50%, and 5.75%) – assuming everything else stays constant
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