Question

The EBIT of Harbinger Company for the year just ended was $424 million. Its depreciation expense...

The EBIT of Harbinger Company for the year just ended was $424 million. Its depreciation expense was $140 million and the increase in its operating net working capital was $130 million. No new investment in fixed assets is expected in the foreseeable future. The FCFF is expected to experience a steady rate of growth of 6% per year in for the foreseeable future. Harbinger has total liabilities of $1,340 million. The cost of capital for the company is 12% and the required rate of return on the stock is 17%. Harbinger’s number of shares outstanding is 150 million shares and its marginal tax rate is 40%. Calculate the price of the company’s stock. (Assume that all liabilities shown above are at market values and no increases in fixed assets are required).

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Answer #1

EBIT = $ 424 million, Tax Rate = 40 %

Net Operating Profit After Tax (NOPAT) = EBIT x (1-Tax Rate) = 424 x (1-0.4) = $ 254.4 million

FCFF = NOPAT + Depreciation Expense - Increase in Operating Net Working Capital (NWC) = 254.4 + 140 - 130 = $ 264.4 million

Constant Perpetual Growth Rate = 6 % and Cost of Capital = 12 %

Therefore, Firm Value = [264.4 x 1.06] / [0.12 - 0.06] = $ 4671.067 million (the discount rate used is the cost of capital instead of the cost of equity(required return on stock) as the firm value and not just the equity (stock) value is being calculated)

Market Value of Debt = D = $ 1340 million

Equity Value = Firm Value - D = 4671.067 - 1340 = $ 3331.067 million and Number of Shares Outstanding = 150 million

Current Stock Price = 3331.067 / 150 = $ 22.207 ~ $ 22.21

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