I was asked this question -
A hypothetical company is like a black box. The blackBox guarantees an inflation adjusted Free Cash Outflow of $100 per month for the next 5 years. There is absolutely no uncertainty around this FCF. What is the EV of the blackBox? How will you calculate the stock price if there are only 10 shares outstanding ? No further info is available.
My problem is - is there any catch in this ?
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Nah. Simple present value calculation. Just need to get a discount factor.
Value = 10 / discount rate
Free Cash Outflow of $100 - was that a typo or does it actually imply a negative FCF for the next 5 years.
Maybe that's where the trick was?
1) calculate the nominal cash flows based on $100 real cash flows and the expected inflation rate. 2) discount the nominal cash flows at the risk free rate (5 year t-notes since that is the only comparable risk free security).
Sum of those cash flows is the total EV, that sum divided by 10 is the per share value.
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