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Question
Rainy City Coffee's (RCC) free cash flow next year will be $100 million and it is expected to grow at a 4 percent annual rate indefinitely. The company's weighted average cost of capital is 10 percent, the market value of its liabilities is $1 billion, and it has 20 million shares outstanding.
a. Estimate the price per share of RCC's common stock.
b. A hedge fund believes that by selling the company's private jet and instituting other cost savings, it can increase RCC's free cash flow next year to $110 million and can add a full percentage point to RCC's growth rate without affecting its cost of capital. What is the maximum price per share the hedge fund can justify bidding for control of RCC?
Answer
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