Decker tires' free cash flow was just fcf0 = $1.32. analysts expect the company's free cash flow to grow by 30% this year, by 10% in year 2, and at a constant rate of 5% in year 3 and thereafter. the wacc for this company 9.00%. decker has $4 million in short-term investments and $14 million in debt and 1 million shares outstanding. what is the best estimate of the stock's current intrinsic price? a. $31.59b. $32.65c. $33.75d. $34.87e. $35.99

d. $34.87

Explanation:

We need to calcualte the value of the company. This is done by addingthe present vbalue of the future free cash flow of the firm.

FCF0 = 1.32 (current accounting period)

FCF 1.32 + 30% = 1.716

FCF2 FCF1 + 10% = 1.716 x 1.1 = 1.8876‬

FCF3 FCF + 5% = 1.8876 x 1.05 =  1.98198‬

From here after we use the gordon model:

WACC = 9%

grow = 5%

we use FCF instead of dividends: 1.98198

Value of the future cash flow 49,5495

Now, as this are in the future we must adjust using the present value of a lump sum:

PV   1.5743

PV   1.5888

PV   41.7048

Total: 1.5743 + 1.5888 + 41.7048 = 44,8679‬

Now we adjust for shrot term investment and debt outstanding:

vresent value of the future cash flow 44,8679‬

short term investment:                          4.0000

debt outstanding                                   (14.000)  

Net:                                                        34.8679

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c.

clarify customers’ doubts only when asked.