politician Based on the corporate valuation model the value of a company's operations is 1,200 million ( 1,2 bIn) The company's balance sheet shows 80 million in accounts receivable, 60 million in inventory;and 100 million in short-term investments that are unrelated I to operations. The balance sheet also shows 90 million in accounts payable, 120 million in notes payable, 300 million in long- term debt, 50 million in preferred stock, 180 million in retained earnings , and 800 million in total common equity. If the company has 30 million shares of stock outstanding, what is the best estimate of the stock's price per share?

To estimate the stock's price per share, we can use the corporate valuation model, which is based on the discounted cash flow (DCF) method. The DCF method involves estimating the free cash flows of the company and discounting them to their present value using the weighted average cost of capital (WACC).<br /><br />Given information:<br />- Value of the company's operations: $1,200 million<br />- Accounts receivable: $80 million<br />- Inventory: $60 million<br />- Short-term investments unrelated to operations: $100 million<br />- Accounts payable: $90 million<br />- Notes payable: $120 million<br />- Long-term debt: $300 million<br />- Preferred stock: $50 million<br />- Retained earnings: $180 million<br />- Total common equity: $800 million<br />- Number of shares outstanding: 30 million<br /><br />Step 1: Calculate the total value of the company.<br />Total value of the company = Value of operations + Accounts receivable + Inventory + Short-term investments<br />Total value of the company = $1,200 million + $80 million + $60 million + $100 million = $1,440 million<br /><br />Step 2: Calculate the total debt and equity of the company.<br />Total debt = Notes payable + Long-term debt + Preferred stock<br />Total debt = $120 million + $300 million + $50 million = $470 million<br /><br />Total equity = Retained earnings + Total common equity<br />Total equity = $180 million + $800 million = $980 million<br /><br />Step 3: Calculate the WACC.<br />WACC = (Weight of debt × Cost of debt) + (Weight of equity × Cost of equity)<br />Assuming a cost of debt of 5% and a cost of equity of 10%, and a debt-to-equity ratio of 0.5:<br />WACC = (0.5 × 5%) + (0.5 × 10%) = 7.5%<br /><br />Step 4: Calculate the free cash flows.<br />Free cash flow = Operating cash flow - Capital expenditures<br />Operating cash flow = Net income + Depreciation<br />Net income = Total equity × Return on equity<br />Net income = $980 million × 10% = $98 million<br />Depreciation = (Inventory + Accounts receivable) / 2 = ($60 million + $80 million) / 2 = $70 million<br />Operating cash flow = $98 million + $70 million = $168 million<br />Capital expenditures = 25% of operating cash flow = 0.25 × $168 million = $42 million<br />Free cash flow = $168 million - $42 million = $126 million<br /><br />Step 5: Calculate the present value of the free cash flows.<br />Present value of free cash flows = Free cash flow / (1 + WACC)^1<br />Present value of free cash flows = $126 million / (1 + 0.075) = $118.52 million<br /><br />Step 6: Calculate the intrinsic value of the stock.<br />Intrinsic value of the stock = Present value of free cash flows / Number of shares<br />Intrinsic value of the stock = $118.52 million / 30 million = $3.95<br /><br />Therefore, the best estimate of the stock's price per share is $3.95.