Question

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

Year	1	2	3	4	5
FCF	-$22.13	$38.4	$43.5	$52.8	$55.9

The weighted average cost of capital is 9%, 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 18 million shares outstanding. What is the value of the stock price today (Year 0)?

Answer 1

The price per share is computed as shown below:

= FCF1 / (1 + WACC) + FCF 2 / (1 + WACC)² + FCF3 / (1 + WACC)³ + FCF4 / (1 + WACC)⁴ + FCF5 / (1 + WACC)⁵ + 1 / (1 + WACC)⁵ [ ( FCF in year 5 (1 + growth rate) / (WACC - growth rate) ]

= - $ 22.13 million / 1.09 + $ 38.4 million / 1.09² + $ 43.5 million / 1.09³ + $ 52.8 million / 1.09⁴ + $ 55.9 million / 1.09⁵ + 1 / 1.09⁵ x [ ($ 55.9 million x 1.04) / (0.09 - 0.04) ]

= - $ 22.13 million / 1.09 + $ 38.4 million / 1.09² + $ 43.5 million / 1.09³ + $ 52.8 million / 1.09⁴ + $ 55.9 million / 1.09⁵ + $ 1,162.72 million / 1.09⁵

= - $ 22.13 million / 1.09 + $ 38.4 million / 1.09² + $ 43.5 million / 1.09³ + $ 52.8 million / 1.09⁴ + $ 1,218.62 million / 1.09⁵  

= $ 875.0319779 million

So, the value per share is computed as follows:

= ( $ 875.0319779 million - value of debt) / Number of shares

= ($ 875.0319779 million - $ 26 million) / 18 million shares

= $ 47.17 Approximately

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