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The Quick Buck Company is an all-equity firm that has been in existence for the past three years. Company management expects that the company will last for two more years and then be dissolved. The firm will generate cash flows of $860,000 next year and $1,340,000 in two years, including the proceeds from the liquidation. There are 38,000 shares of stock outstanding and shareholders require a return of 11 percent. a. What is the current price per share of the stock

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sadddamkashmiri801

Answer:

$49.01 per Share

Explanation:

We can find the value of the unit share of company that will be dissolved at the end of year 2 by using the following formula:

Current Price per Share = Value of Firm Today (Step1) / Number of Shares

= $1,862,345 / 38,000 shares

= $49.01 per Share

Step 1: Find the value of the firm in today's price by using the discounting technique

Value of Firm Today = Cash Flow for Year 1 / (1+r)^1       +        Cash Flow for Year 2 / (1+r)^2

=  $860,000  / (1 + 11%)^1     +    $1,340,000 / (1 + 11%)^2

= $774,774  +   $1,087,571

= $1,862,345

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