Covan, Inc. is expected to have the following free cash flow: LOADING a. Covan has million shares outstanding, $ million in excess cash, and it has no debt. If its cost of capital is , 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 million shares outstanding, $ million in excess cash, and it has no debt. If its cost of capital is , what should be its stock price?

Since the numbers are missing, I looked for a similar question.

a)

year        FCF (in millions)

1                      $10

2                     $12

3                     $13

4                     $14

5                     4% growth rate

terminal value at year 4 = ($14 x 1.04) / (0.1 - 0.04) = $242.67

the firm's total value = $10/1.1 + $12/1.1² + $13/1.1³ + $14/1.1⁴ + $242.67/1.1⁴ + $2 (excess cash) = $9.09 + $9.92 + $9.77 + $9.56 + $165.75 + 2 = $206.09

price per stock = $206.09 / 7 = $29.44

b) excess cash $12

the firm's total value = $12/1.1 + $13/1.1² + $14/1.1³ + $242.67/1.1³ + $12 (excess cash) = $10.91 + $10.74 + $10.52 + $182.32 + $12 = $226.49

price per stock = $226.49 / 7 = $32.36

c) capital gains yield = ($32.36 - $29.44) / $29.44 = 9.92%

answer: 11/12

step-by-step explanation: 4 1/4 and 3 1/3 is equivalent to 4 3/12 and 3 4/12. 4 3/12 - 3 4/12 =11/12