Question

Assume today is December 31, 2013. Barrington Industries expects that its 2014 after-tax operating income [EBIT(1 – T)] will be $440 million and its 2014 depreciation expense will be $60 million. Barrington's 2014 gross capital expenditures are expected to be $110 million and the change in its net operating working capital for 2014 will be $25 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 8.9%; the market value of the company's debt is $2.65 billion; and the company has 190 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.

Answer 1

Free cash flows (FCF) of the firm = After-tax operating income + Depreciation - Capital expenditure - change in NWC = $440 million + $60 million - $110 million - $25 million = $365 million

Value of firm = FCF / (Ke - g) = $365 million / (0.089 - 0.055) = $10735.2941176 million

where, Ke = required return and g = growth rate

Value of equity = Value of firm - Value of debt = $10735.2941176 million - $2650 million = $8085.2941176 million

Stock Price = Value of equity / No. of shares outstanding = $8085.2941176 million / 190 million = $42.5542 or $42.55