Question

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

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

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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