Question

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.

Answer #1

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

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...

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Barrington's 2014 gross capital expenditures are expected to be
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for 2014 will be $30 million. The firm's free cash flow is expected
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cash flow occurs...

Assume today is December 31, 2013. Barrington Industries expects
that its 2014 after-tax operating income [EBIT(1 - T)] will be $420
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...

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its 2014 depreciation expense will be $65 million. Barrington's
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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...

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December 31, 2013. Barrington Industries expects that its 2014
after-tax operating income [EBIT(1 – T)] will be $450 million and
its 2014 depreciation expense will be $65 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 5.5% annually. Assume that its free...

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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...

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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
$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...

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its 2017 depreciation expense will be $60 million. Barrington's
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that its 2017 after-tax operating income [EBIT(1 – T)] will be $410
million and its 2017 depreciation expense will be $65 million.
Barrington's 2017 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 5.5% annually. Assume that its free
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