Top Gold Stocks To Keep An Eye On – March 4th

We are going to use the following information: - The company's stock is currently priced at $50 per share. - The company has 1 million shares outstanding. - The company's cost of equity is 10%. - The company's cost of debt is 5%. - The company's tax rate is 40%. - The company's capital structure is 40% debt and 60% equity. - The company's free cash flow is expected to be $10 million next year and is expected to grow at a constant rate of 5% per year forever. We are going to calculate the company's WACC, value of operations, and value of equity per share. Step 1: Calculate the after-tax cost of debt. After-tax cost of debt = Cost of debt * (1 - Tax rate) = 5% * (1 - 0.4) = 5% * 0.6 = 3%. Step 2: Calculate the WACC. WACC = (Weight of debt * After-tax cost of debt) + (Weight of equity * Cost of equity) WACC = (0.4 * 3%) + (0.6 * 10%) = (0.4 * 0.03) + (0.6 * 0.10) = 0.012 + 0.06 = 0.072 or 7.2%. Step 3: Calculate the value of operations. The value of operations (Vop) is calculated using the formula: Vop = FCF1 / (WACC - g) Where FCF1 is the free cash flow next year, WACC is the weighted average cost of capital, and g is the growth rate. FCF1 = $10 million, WACC = 7.2%, g = 5%. Vop = $10 million / (0.072 - 0.05) = $10 million / 0.022 = $454.545 million. Step 4: Calculate the value of equity. Value of equity = Value of operations - Value of debt We need to find the value of debt. The capital structure is 40% debt and 60% equity. But we need to find the value of debt from the capital structure. Let D be the value of debt, E be the value of equity, and V be the value of the firm (which is the value of operations since there are no non-operating assets). V = D + E Given that D/V = 40%, so D = 0.4V Similarly, E = 0.6V But we have V = $454.545 million So D = 0.4 * $454.545 million = $181.818 million Then E = V - D = $454.545 million - $181.818 million = $272.727 million Step 5: Calculate the value of equity per share. Number of shares outstanding = 1 million Value of equity per share = $272.727 million / 1 million = $272.73 per share. So the value of equity per share is $272.73. But let's double-check: The value of operations is $454.545 million. The capital structure is 40% debt, so debt is $181.818 million. Equity is $272.727 million. Per share is $272.73. The answer should be $272.73. However, the problem might be interpreted differently. Sometimes the value of operations is calculated as the present value of free cash flows, and then the value of equity is value of operations minus debt. But here we have the capital structure, so we can find the debt from the value of operations. Yes, that seems correct. So the value of equity per share is $272.73. But let's see if there's any other information. The problem gives the current stock price, but that might be a red herring or used for something else? The question is to find the value of equity per share based on the free cash flow and growth rate. So we are correct. Thus, the answer is $272.73. But the options might be given, so we need to see if it matches any option. Since no options are provided, we'll just state the answer. So the value of equity per share is $272.73. But wait, the growth rate is 5%, and the WACC is 7.2%, so the denominator is 2.2%, which gives $10/0.022 = $454.545 million for Vop. Then equity is 60% of that, so $454.545 * 0.6 = $272.727 million, which is $272.73 per share. Yes. So the answer is $272.73. But let's round it to two decimal places. So the value of equity per share is $272.73. I think that's the answer.To calculate the value of equity per share, we need to find the value of operations and then subtract the value of debt to get the value of equity. Then, we divide by the number of shares outstanding. **Step 1: Calculate the after-tax cost of debt.** - Cost of debt = 5% - Tax rate = 40% - After-tax cost of debt = 5% × (1 - 0.4) = 3% **Step 2: Calculate the WACC.** - Weight of debt = 40% - Weight of equity = 60% - Cost of equity = 10% - WACC = (Weight of debt × After-tax cost of debt) + (Weight of equity × Cost of equity) - WACC = (0.4 × 3%) + (0.6 × 10%) = 1.2% + 6% = 7.2% **Step 3: Calculate the value of operations.** - FCF₁ = $10 million - Growth rate (g) = 5% - Value of operations (Vop) = FCF₁ / (WACC - g) - Vop = $10 million / (0.072 - 0.05) = $10 million / 0.022 = $454.545 million **Step 4: Calculate the value of debt.** - Since the capital structure is 40% debt and 60% equity, the value of debt is 40% of the value of operations. - Value of debt = 0.4 × $454.545 million = $181.818 million **Step 5: Calculate the value of equity.** - Value of equity = Value of operations - Value of debt - Value of equity = $454.545 million - $181.818 million = $272.727 million **Step 6: Calculate the value of equity per share.** - Number of shares outstanding = 1 million - Value of equity per share = $272.727 million / 1 million = $272.73 Therefore, the value of equity per share is **$272.73**. \boxed{272.73}