Question

Assume today is December 31, 2016. Barrington Industries expects that its 2017 after-tax operating income [EBIT(1 – T)] will be $410 million and its 2017 depreciation expense will be $65 million. Barrington's 2017 gross capital expenditures are expected to be $110 million and the change in its net operating working capital for 2017 will be $30 million. The firm's free cash flow is expected to grow at a constant rate of 5.5% annually. Assume that its free cash flow occurs at the end of each year. The firm's weighted average cost of capital is 8.5%; the market value of the company's debt is $2.05 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 free cash flow valuation model, what should be the company's stock price today (December 31, 2016)? Round your answer to the nearest cent. Do not round intermediate calculations. $ _____ per share

Answer 1

Expected FCF = EBIT * (1 - Tax rate) + Depreciation - Capital Expenditure - Change in working Capital

= $410 + $65 - $110 - $30

= $335 million.

Expected Free cash flow of company is $335 million.

Value of firm = Expected FCF / (WACC - Growth rate)

= $335 / (8.50% - 5.50%)

= $11,166.67 million.

Value of firm is $11,166.67 million.

Value of equity = Value of firm - Value of debt

= $11,166.67 - $2,050

= $9,166.67.

Value of equity is $9,166.67 million.

Intrinsic value of equity = Value of equity / Number of share outstanding

= $9,166.67 / 180

= $50.65.

Intrinsic value of equity is $50.65 .