Question

# Hadley Inc. forecasts the year-end free cash flows (in millions) shown below. Year 1 2 3...

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.

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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