Question

**Quantitative Problem 2:** Hadley Inc. forecasts
the year-end free cash flows (in millions) shown below.

Year | 1 | 2 | 3 | 4 | 5 |

FCF | -$22.47 | $37.2 | $43.4 | $51.3 | $56.7 |

The weighted average cost of capital is 12%, and the FCFs are
expected to continue growing at a 3% 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 19 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

Answer #1

Present value (PV) = sum of present value of all future cash flows

After end of 5 years there is a perpetuity model with constant growth which can be calculated using the formula FCF* (1+ FCF growth rate)/ (return rate - growth rate) which needs to be discounted back from year 5 to year 0 (present value)

PV = -22.47/(1+12%)+37.2/(1+12%)^2+43.4/(1+12%)^3+51.3/(1+12%)^4+56.7/(1+12%)^5+56.7*(1+5%)/(12%-5%)/(1+12%)^5=$587.86 mn

Value of equity = PV - value of debt = $587.86 mn - $24 mn=$563.86 mn

Share value = value of equity / no of shares = $563.86 mn/19mn=$29.68

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