Question

Assume today is December 31, 2017. Barrington Industries expects that its 2018 after-tax operating income [EBIT(1 – T)] will be $440 million and its 2018 depreciation expense will be $60 million. Barrington's 2018 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 4.5% annually. Assume that its free cash flow occurs at the end of each year. The firm's weighted average cost of capital is 8%; the market value of the company's debt is $2.65 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, 2017)? Do not round intermediate calculations. Round your answer to the nearest cent.

$ per share

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

Year | 1 | 2 | 3 | 4 | 5 |

FCF | -$22.43 | $37.5 | $43.8 | $51.8 | $56.1 |

The weighted average cost of capital is 12%, and the FCFs are expected to continue growing at a 3% 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 20 million shares outstanding. What is the value of the stock price today (Year 0)? Do not round intermediate calculations. Round your answer to the nearest cent.

$ per share

According to the valuation models developed in this chapter, the value that an investor assigns to a share of stock is dependent on the length of time the investor plans to hold the stock.

The statement above is -Select-truefalseCorrect 2 of Item 2.

Answer #1

EBIT(1-T) = $440 million

Add: Depreciation 60 million

Less: Gross Capital Expenditure = $110 million

Increase in Net Operating Working capital = $30 million

Free cash flow = $360 million

Firm Value = Free cash flow next year/(WACC – growth rate)

= 360/(8%-4.5%)

= $10,285.71 million

Less: Value of debt = $2,650 million

Value of Equity = $7,635.71 million

Number of shares = 180 million

**Intrinsic value per share = $42.42**

2.Enterprise value = present value of all future free cash flows

= -22.43/(1.12)+37.5/(1.12)^2 + 43.8/(1.12)^3 + 51.8/(1.12)^4 + 56.1/(1.12)^5 + 56.1(1.03)/(1.12)^5(12%-3%)

= 470.10 million

Value per share = (470.10 – 25)/20

= $22.26 per share

False

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that its 2018 after-tax operating income [EBIT(1 – T)] will be $410
million and its 2018 depreciation expense will be $70 million.
Barrington's 2018 gross capital expenditures are expected to be
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December 31, 2016. Barrington Industries expects that its 2017
after-tax operating income [EBIT(1 – T)] will be $440 million and
its 2017 depreciation expense will be $60 million. Barrington's
2017 gross capital expenditures are expected to be $100 million and
the change in its net operating working capital for 2017 will be
$25 million. The firm's free cash flow is expected to grow at a
constant rate of 6.5% annually. Assume that its free...

Quantitative Problem 1: Assume today is
December 31, 2016. Barrington Industries expects that its 2017
after-tax operating income [EBIT(1 – T)] will be $450 million and
its 2017 depreciation expense will be $60 million. Barrington's
2017 gross capital expenditures are expected to be $100 million and
the change in its net operating working capital for 2017 will be
$20 million. The firm's free cash flow is expected to grow at a
constant rate of 5% annually. Assume that its free...

Assume today is December 31, 2019. Barrington Industries expects
that its 2020 after-tax operating income [EBIT(1 – T)] will be $430
million and its 2020 depreciation expense will be $65 million.
Barrington's 2020 gross capital expenditures are expected to be
$110 million and the change in its net operating working capital
for 2020 will be $30 million. The firm's free cash flow is expected
to grow at a constant rate of 5% annually. Assume that its free
cash flow occurs...

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...

Assume today is December 31, 2013. Barrington Industries expects
that its 2014 after-tax operating income [EBIT(1 – T)] will be $410
million and its 2014 depreciation expense will be $60 million.
Barrington's 2014 gross capital expenditures are expected to be
$100 million and the change in its net operating working capital
for 2014 will be $30 million. The firm's free cash flow is expected
to grow at a constant rate of 6.5% annually. Assume that its free
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net operating working capital for 2017 will be $20 million. The
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