Question

Quantitative Problem 2: Hadley Inc. forecasts the year-end free cash flows (in millions) shown below. Year 1 2 3 4 5 FCF -$22.89 $37.4 $43.9 $52.2 $55.6 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 $25 million of market-value debt, but it has no preferred stock or any other outstanding claims. There are 18 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

Answer 1

computation of present value of Free cash flow
i	ii		iii=i+ii	iv	v	vi=iv*v
year	FCF		Terminal value	total cash flow	PVIF @ 9%	present value
1	(22.89)			(22.89)	0.917431193	(21.00)
2	37.40			37.40	0.841679993	31.48
3	43.90			43.90	0.77218348	33.90
4	52.20			52.20	0.708425211	36.98
5	55.60		1156.48	1,212.08	0.649931386	787.77
						869.13
Terminal value = FCF 6/(required rate - growth rate)
		55.6*104%/(9%-4%)
		1156.48
		Value of firm =			$      869.13
	Less	Value of debt -=			$       (25.00)
		value of equity			$      844.13
		Number of share outstanding =		18
		Price per share=			$        46.90
		844.13/18
		answer =				$        46.90