Question

Quantitative Problem 2: Hadley Inc. forecasts the year-end free cash flows (in millions) shown below.

Year	1	2	3	4	5
FCF	-$22.86	$38.3	$43.2	$51.3	$56.5

The weighted average cost of capital is 12%, and the FCFs are expected to continue growing at a 3% 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 19 million shares outstanding. Also, the firm has zero non-operating assets. 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

According to the valuation models developed in this chapter, the value that an investor assigns to a share of stock is dependent on the length of time the investor plans to hold the stock.

The statement above is -Select-truefalse

Answer 1

	WACC=	12.00%
Year	Previous year FCF	FCF growth rate	FCF current year	Horizon value	Total Value	Discount factor	Discounted value
1	0	0.00%	-22.86		-22.86	1.12	-20.4107
2	-22.86	0.00%	38.3		38.3	1.2544	30.53253
3	38.3	0.00%	43.2		43.2	1.404928	30.74891
4	43.2	0.00%	51.3		51.3	1.57351936	32.60208
5	51.3	0.00%	56.5	646.611	703.111	1.762341683	398.96406
	Long term growth rate (given)=	3.00%			Value of Enterprise =	Sum of discounted value =	472.44
Where
Total value = FCF + horizon value (only for last year)
Horizon value = FCF current year 5 *(1+long term growth rate)/( WACC-long term growth rate)
Discount factor=(1+ WACC)^corresponding period
Discounted value=total value/discount factor

Enterprise value = Equity value+ MV of debt

472.44 = Equity value+26

Equity value = 446.44

share price = equity value/number of shares

share price = 446.44/19

share price = 23.5