Question

Quantitative Problem 1: Assume today is December 31, 2016. Barrington Industries expects that its 2017 after-tax operating income [EBIT(1 – T)] will be $440 million and its 2017 depreciation expense will be $60 million. Barrington's 2017 gross capital expenditures are expected to be $100 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 6.5% annually. Assume that its free cash flow occurs at the end of each year. The firm's weighted average cost of capital is 8.7%; the market value of the company's debt is $2.1 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 free cash flow valuation model, what should be the company's stock price today (December 31, 2016)? Round your answer to the nearest cent. Do not round intermediate calculations.
$  per share

Answer 1

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Answer:

	Year			2017
	ebit (1-t)			440
add	depreciation exp			60
	total		a	500
less	capital expense			100
less	working capital			25
	total		b	125
	Free cash flow		a-b	375
	in millions			375000000
	divided by			k-g
	k			8.7
	g			6.5
				2.2
	therefore			375000000
				0.022
	value of the firm			17045454545
	less value of debt			2100000000
	value of equity		a	14945454545
	number of shares		b	180000000
	per share value		a/b	83.03