Question

I need to know about equations used and how to by hand!

A. Quantitative Problem 1: Assume today is December 31, 2013. Barrington Industries expects that its 2014 after-tax operating income [EBIT(1 – T)] will be $400 million and its 2014 depreciation expense will be $60 million. Barrington's 2014 gross capital expenditures are expected to be $100 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 4.5% annually. Assume that its free cash flow occurs at the end of each year. The firm's weighted average cost of capital is 8.1%; the market value of the company's debt is $2.75 billion; and the company has 180 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

B. Quantitative Problem 2: Hadley Inc. forecasts the year-end free cash flows (in millions) shown below. Year 1 2 3 4 5 FCF -$22.32 $38.4 $43.1 $51.9 $56.2 The weighted average cost of capital is 12%, and the FCFs are expected to continue growing at a 4% rate after Year 5. The firm has $24 million of market-value debt, but it has no preferred stock or any other outstanding claims. There are 19 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

C. 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 (True/Flase) ?

Answer 1

Answer for A.

All values in $ million except share price

Answer B.

All values in $ million except share price

Answer for C.

False. Since, an investor vales the business based on present value, there is no time frame for the decision. It's based on assumption that if the current price is less than DCF, then the market will rationalize and value of share will increase, hence, the investor will buy the share