Covan, Inc., is expected to have the following free cash flows:

Year 1 2 3 4
FCF 10 12 13 14 grow by 4% per year

a. Covan has 8 million shares outstanding, $3 million in excess cash, and it has no debt. If its cost of capital is 12%, what should its stock price be?

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b. Covan reinvests all its FCF and has no plans to add debt or change its cash hold-ings. If you plan to sell Covan at the beginning of year 2, what should you expect its price to be?

c. Assume you bought Covan stock at the beginning of year 1. What is your expected return from holding Covan stock until year 2?


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