River Enterprises has 500 million in debt and 20 million shares of equity outstanding. Its excess cash reserves are $13 million. They are expected to generate $201 million in free cash flows next year with a growth rate of 2% per year in perpetuity. River Enterprises' weighted average cost of capital is 11%. After analyzing the company, you believe that the growth rate should be 33% instead of 2%. How much higher (in dollars) would the price per share be if you are right?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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River Enterprises has 500 million in debt and 20 million shares of equity outstanding. Its excess cash reserves
are $13 million. They are expected to generate $201 million in free cash flows next year with a growth rate of
2% per year in perpetuity. River Enterprises' weighted average cost of capital is 11%. After analyzing the
company, you believe that the growth rate should be 33% instead of 2%. How much higher (in dollars)
would the price per share be if you are right?
Transcribed Image Text:River Enterprises has 500 million in debt and 20 million shares of equity outstanding. Its excess cash reserves are $13 million. They are expected to generate $201 million in free cash flows next year with a growth rate of 2% per year in perpetuity. River Enterprises' weighted average cost of capital is 11%. After analyzing the company, you believe that the growth rate should be 33% instead of 2%. How much higher (in dollars) would the price per share be if you are right?
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