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9-20. Assume that today is December 31, 2008, and that the following information
applies to Vermeil Airlines:

- After-tax operating income [EBIT (1-T)] for 2009 is expected to be $500 million.
- The depreciation expense for 2009 is expected to be $100 million.
- The capital expenditures for 2009 are expected to be $200 million.
- No change is expected in networking capital.
- The free cash flow is expected to grow at a constant rate of 6% per year.
- The required return on equity is 14%.
- The WACC is 10%.
- The market value of the companys debt is $3 billion.
- 200 million shares of stock are outstanding.

Using the corporate valuation model approach, what should be the companys stock price
today?

Capital Net operating

FCF es workingcapital
= EBIT(1 T) + Depreciation expenditur
= $500,000,000 + $100,000,000 $200,000,000 $0
= $400,000,000.

FCF
Firm value = WACC g
$400,000,000
=
0.10 0.06
$400,000,000
=
0.04
= $10,000,000,000.

This is the total firm value. Now find the market value of its equity.

MVTotal = MVEquity + MVDebt

$10,000,000,000 = MVEquity + $3,000,000,000
MVEquity = $7,000,000,000.

This is the market value of all the equity. Divide by the number of shares to find
the price per share. $7,000,000,000/200,000,000 = $35.00.