Question

Assume today is December 31, 2017. Barrington Industries expects 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 $110 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 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 $2.05 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 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.

Answer 1

Free cashflow forn 2018=(EBIT*(1-t))+depreciation-capital expenditures-changes in working capital

=$410+70-$110-$25=$345 million

Vlaue of the firm=Free cashflow 2018/(WACC-growth rate)=$345/(8%-4.5%)=$9,857.14 million

Given Market value of the debt=$2.05 billion=$2050 million

Market value of the Equity=Total value of the firm-Market value of the debt=$9857.14-$2050=$7807.14 million

Stock price=Market value of the equity/Total number of shares=$7807.14/190=$41.1

Stock price=$41.1