Scampini Technologies is expected to generate $\$25$ million in free cash flow next year, and FCF is expected to grow at a constant rate of $7\%$ per year indefinitely. Scampini has no debt or preferred stock, and its WACC is $11\%$ , and it has zero nonoperating assets. If Scampini has $55$ million shares of stock outstanding, what is the stock's value per share?

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Grade 8

Compound interest

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Q. Scampini Technologies is expected to generate

\$25

million in free cash flow next year, and FCF is expected to grow at a constant rate of

7\%

per year indefinitely. Scampini has no debt or preferred stock, and its WACC is

11\%

, and it has zero nonoperating assets. If Scampini has

55

million shares of stock outstanding, what is the stock's value per share?

Identify Given Information: Identify the given information. $\newline$ We have: $\newline$ Free Cash Flow (FCF) next year: $\$25$ million $\newline$ Growth rate of FCF: $7\%$ per year $\newline$ Weighted Average Cost of Capital (WACC): $11\%$ $\newline$ Number of shares outstanding: $55$ million $\newline$ No debt or preferred stock and zero nonoperating assets.
Calculate Company Value: Calculate the value of the company using the Gordon Growth Model (also known as the Perpetuity Growth Model). $\newline$ The formula for the Gordon Growth Model is: $\newline$ Value of the company = $FCF \times (1 + \text{Growth rate}) / (\text{WACC} - \text{Growth rate})$
Plug in Values: Plug in the given values into the Gordon Growth Model formula. $\newline$ Value of the company = $\$25 \text{ million} \times (1 + 0.07) / (0.11 - 0.07)$
Perform Calculations: Perform the calculations. $\newline$ Value of the company = $\$25$ million $*$ $1$ . $07$ / $0$ . $04$ $\newline$ Value of the company = $\$26.75$ million / $0$ . $04$ $\newline$ Value of the company = $\$668.75$ million
Calculate Stock Value: Calculate the stock's value per share. Stock's value per share = $\frac{\text{Value of the company}}{\text{Number of shares outstanding}}$ Stock's value per share = $\frac{\$668.75 \text{ million}}{55 \text{ million}}$
Final Calculation: Perform the final calculation to find the stock's value per share. $\newline$ Stock's value per share = $\$668.75$ million / $55$ million $\newline$ Stock's value per share = $\$12.1591$ (rounded to four decimal places)