In: Finance
Quantitative Problem part 1: Assume today is
December 31, 2013. Barrington Industries expects that its 2014
after-tax operating income [EBIT(1 – T)] will be $440 million and
its 2014 depreciation expense will be $65 million. Barrington's
2014 gross capital expenditures are expected to be $120 million and
the change in its net operating working capital for 2014 will be
$30 million. The firm's free cash flow is expected to grow at a
constant rate of 5% annually. Assume that its free cash flow occurs
at the end of each year. The firm's weighted average cost of
capital is 8.2%; the market value of the company's debt is $2
billion; and the company has 190 million shares of common stock
outstanding. The firm has no preferred stock on its balance sheet
and has no plans to use it for future capital budgeting projects.
Using the corporate valuation model, what should be the company's
stock price today (December 31, 2013)? Round your answer to the
nearest cent. Do not round intermediate calculations.
$ per share
Quantitative Problem part 2: Hadley Inc. forecasts the year-end free cash flows (in millions) shown below.
Year | 1 | 2 | 3 | 4 | 5 |
FCF | -$22.39 | $37.3 | $43.2 | $52.6 | $56.4 |
The weighted average cost of capital is 9%, and the FCFs are
expected to continue growing at a 4% rate after Year 5. The firm
has $26 million of market-value debt, but it has no preferred stock
or any other outstanding claims. There are 20 million shares
outstanding. What is the value of the stock price today (Year 0)?
Round your answer to the nearest cent. Do not round intermediate
calculations.
$ per share
2- |
Expected free cash flow in year 6 |
56.4*1.04 |
58.656 |
|
terminal value of firm |
expected free cash flow/(WACC-growth rate) |
58.656/(9%-4%) |
1173.12 |
|
Year |
free cash flow |
present value of free cash flow = free cash flow/(1+WACC)^n WACC = 9% |
||
1 |
-22.39 |
-20.5413 |
||
2 |
37.3 |
31.39466 |
||
3 |
43.2 |
33.35833 |
||
4 |
52.6 |
37.26317 |
||
5 |
56.4 |
36.65613 |
||
5 |
1173.12 |
762.4475 |
||
present value of company |
880.5785 |
|||
less market value of debt |
26 |
|||
value of shares |
854.5785 |
|||
no of shares |
20 |
|||
value per share |
42.73 |
|||
1- |
Free cash flow |
operating profit after tax + depreciation-change in working capital-capital expenditure |
440+65-30-120 |
355 |
Expected free cash flow |
355*1.05 |
372.75 |
||
value of firm |
expected free cash flow/(WACC-growth rate) |
372.75/(8.2%-5%) |
11648.44 |
|
value of debt |
2000 |
|||
value of shares |
9648.438 |
|||
no of shares |
190 |
|||
value per share |
9648.438/190 |
50.78 |