Assume today is December 31, 2013. Barrington Industries expects that its 2014 after-tax operating income [EBIT(1 – T)] will be $400 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 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 8.8%; the market value of the company's debt is $2.2 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 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.
Hadley Inc. forecasts the year-end free cash flows (in millions) shown below.
| Year | 1 | 2 | 3 | 4 | 5 |
| FCF | -$22.87 | $38.1 | $43.6 | $51.1 | $56.6 |
The weighted average cost of capital is 9%, and the FCFs are
expected to continue growing at a 4% 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 21 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.
$ 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.
Free cash Flow= EBIT(1-T)+Dep-Capex-Change in working capital
= $400+$60-$100-$30 =$330 milion
At the constant growth rate of 4.5% and WACC of 8.8%
Value of the firm= FCF(1+G)/(WACC-G)
Value of firm = 330*(1.045)/(0.088-0.045)= $8019.76 Million
Value of equity= $8019.76m-$2.2m=$8017.56m
Stock Price= Value/No. of Shares outstanding.= 8017.56m/180m= $44.54/ share
2. Value of firm= Presnet value of given 5 year cash flow + present value of FCF at constant Growth after 5 year
Presnet value of given 5 year cash flow =-22.87/(1.09)+38.10/(1.09)^2+43.60/(1.09)^3+51.10/(1.09)^4+56.6/(1.09)^5= $117.74 m
present value of FCF at constant Growth after 5 year
=( 56.6*(1.04)/(0.09-0.04))/(1.09)^5= $765.15m
Value of the firm = $117.74+$765.15= $882.89m
Stock Price=$(882.89-25)m/21m=$40.85 per share
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