Kay’s Chemical’s the most recent free cash flow (FCF0) is $100 million. The free cash flow is expected to grow at a rate of 30 percent, 20 percent, 10 percent in next three years. After three years, it is expected to grow forever at a constant rate of 5 percent. The cost of common stock (rs) is 10% and the weighted average cost of capital (WACC) is 8%. Kay currently has 100 million common shares of outstanding. Kay’s book value of debt is $30 million and the book value of debt is very close to market value of debt. Kay has $8 million marketable securities and $ 7 million of minority investment in another company.
1) Calculate Kay’s stock price using FCF based valuation model.
2) Using EXCEL two-way data table, please show me the stock prices when the constant growth 2 rate changes from 2 to 8% with 1% increment and the weighted average cost of capital (WACC) changes from 5 to 11% with 1% increment.