Covan, Inc. is expected to have the following free cash flow: Year FCF 1 12 2 14 3 15 4 16 Grow by 3% per year a. Covan has 8 million shares outstanding, $2 million in excess cash, and it has no debt. If its cost of capital is 11%, what should be its stock price? b. Covan adds its FCF to cash, and has no plans to add debt. If you plan to sell Covan at the beginning of year 2, what is its expected price? c. Assume you bought Covan stock at the beginning of year 1. What is your expected return from holding Covan stock until year 2?
Covan, Inc. is expected to have the following free cash flow: Year FCF 1 12 2 14 3 15 4 16 Grow by 3% per year a. Covan has 8 million shares outstanding, $2 million in excess cash, and it has no debt. If its cost of capital is 11%, what should be its stock price? b. Covan adds its FCF to cash, and has no plans to add debt. If you plan to sell Covan at the beginning of year 2, what is its expected price? c. Assume you bought Covan stock at the beginning of year 1. What is your expected return from holding Covan stock until year 2?
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter21: Dynamic Capital Structures And Corporate Valuation
Section: Chapter Questions
Problem 9P
Related questions
Question
![Covan, Inc. is expected to have the following free cash flow:
Year
FCF
1
12
2
14
3
15
4
16
Grow by 3% per year
a. Covan has 8 million shares outstanding, $2 million in excess cash, and it has no debt. If its cost of capital is 11%, what should be its stock price?
b. Covan adds its FCF to cash, and has no plans to add debt. If you plan to sell Covan at the beginning of year 2, what is its expected price?
c. Assume you bought Covan stock at the beginning of year 1. What is your expected return from holding Covan stock until year 2?
a. Covan has 8 million shares outstanding, $2 million in excess cash, and it has no debt. If its cost of capital is 11%, what should be its stock price?
The stock price should be $
(Round to the nearest cent.)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F03092b83-2816-4452-a5b3-b0d27fedfe75%2Fad85dbfb-5a15-4650-bb02-f2b6f0d5332b%2Foi2ydqu_processed.png&w=3840&q=75)
Transcribed Image Text:Covan, Inc. is expected to have the following free cash flow:
Year
FCF
1
12
2
14
3
15
4
16
Grow by 3% per year
a. Covan has 8 million shares outstanding, $2 million in excess cash, and it has no debt. If its cost of capital is 11%, what should be its stock price?
b. Covan adds its FCF to cash, and has no plans to add debt. If you plan to sell Covan at the beginning of year 2, what is its expected price?
c. Assume you bought Covan stock at the beginning of year 1. What is your expected return from holding Covan stock until year 2?
a. Covan has 8 million shares outstanding, $2 million in excess cash, and it has no debt. If its cost of capital is 11%, what should be its stock price?
The stock price should be $
(Round to the nearest cent.)
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 6 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Recommended textbooks for you
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Intermediate Financial Management (MindTap Course…](https://www.bartleby.com/isbn_cover_images/9781337395083/9781337395083_smallCoverImage.gif)
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Intermediate Financial Management (MindTap Course…](https://www.bartleby.com/isbn_cover_images/9781337395083/9781337395083_smallCoverImage.gif)
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning