Question

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

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

FCF | -$22.92 | $38.3 | $43.1 | $52.1 | $56.8 |

The weighted average cost of capital is 10%, and the FCFs are expected to continue growing at a 4% rate after Year 5. The firm has $24 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)? Round your answer to the nearest cent. Do not round intermediate calculations.

Answer #1

FCF1 = -$22.92 million

FCF2 = $38.30 million

FCF3 = $43.10 million

FCF4 = $52.10 million

FCF5 = $56.80 million

Growth Rate = 4%

WACC = 10%

FCF6 = FCF5 * (1 + Growth Rate)

FCF6 = $56.80 million * 1.04

FCF6 = $59.072 million

Horizon Value = FCF6 / (WACC - Growth Rate)

Horizon Value = $59.072 million / (0.10 - 0.04)

Horizon Value = $59.072 million / 0.06

Horizon Value = $984.53 million

Value of Firm = -$22.92 million/1.10 + $38.30 million/1.10^2 +
$43.10 million/1.10^3 + $52.10 million/1.10^4 + $56.80
million/1.10^5 + $984.53 million/1.10^5

Value of Firm = $725.37 million

Value of Equity = Value of Firm - Value of Debt

Value of Equity = $725.37 million - $24.00 million

Value of Equity = $701.37 million

Price per share = Value of Equity / Number of Shares

Price per share = $701.37 million / 20.00 million

Price per share = $35.07

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