Covan, Inc. is expected to have the following free cash flow: Year 1 2 3 FCF 11 13 14 15 Grow by 4% per year a. Covan has 8 million shares outstanding, $3 million in excess cash, and it has no debt. If its cost of capital is 12%, 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 1 2 3 FCF 11 13 14 15 Grow by 4% per year a. Covan has 8 million shares outstanding, $3 million in excess cash, and it has no debt. If its cost of capital is 12%, 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?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 8P

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Covan, Inc. is expected to have the following free cash flow: Year 1 2 4 FCF 13 15 16 17 Grow by 5% per year a. Covan has 6 million shares outstanding, $3 million in excess cash, and it has no debt. If its cost of capital is 10%, 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 6 million shares outstanding, $3 million in excess cash, and it has no debt. If its cost of capital is 10%, what should be its stock price? The stock price should be $ (Round to the nearest cent.) b. ovan adds its FCF to cash, and has no plans to add debt. If you plan to sell Cov at the beginning of year 2, what is its expected price? If you plan to sell Covan at the beginning of year 2, its price should be $ (Round to the nearest cent.) c. Assume…
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