Question

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
$20 million. The firm's free cash flow is expected to grow at a
constant rate of 5% annually. Assume that its free cash flow occurs
at the end of each year. The firm's weighted average cost of
capital is 8.2%; the market value of the company's debt is $2.9
billion; and the company has 190 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

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

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

FCF | -$22.34 | $38.8 | $43.4 | $51.6 | $57 |

The weighted average
cost of capital is 12%, and the FCFs are expected to continue
growing at a 5% 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

Answer #1

Calculation of free cash flow for 2017:

EBIT(1-T) = $440 million

Add: Depreciation (non-cash expense) = $60 million

Less: Capital Expenditures = $100 million

Less: Change in NWC = $20 million

Free Cash flow = $380 million

Value of firm is equal to the present value of all future free cash flows

= 380 million/(8.2% - 5%)

= $11,875 million

Value of firm = $11,875 million

Less: value of Debt = $2,900 million

value of Equity = $8,975 million

Number of shares = 190 million

Stock price today = 8,975 million/190

= $47.24

2.Value of firm = -22.34/(1.12) + 38.8/(1.12)^{2} +
43.4/(1.12)^{3} + 51.6/(1.12)^{4} +
57/(1.12)^{5} + 57(1.05)/(12%-5%)(1.12)^{5}

= $592.16 million

Less: Value of Debt = $25 million

Value of stock = $567.16 million

Number of shares = 21 million

Stock Price today = 567.16/21

= $27.01

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Quantitative Problem 1: Assume today is
December 31, 2016. Barrington Industries expects that its 2017
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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
$20 million. The firm's free cash flow is expected to grow at a
constant rate of 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...

Quantitative Problem 1: Assume today is December 31, 2016.
Barrington Industries expects that its 2017 after-tax operating
income [EBIT(1 – T)] will be $410 million and its 2017 depreciation
expense will be $70 million. Barrington's 2017 gross capital
expenditures are expected to be $120 million and the change in its
net operating working capital for 2017 will be $20 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, 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...

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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...

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...

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...

Assume today is December 31, 2013. Barrington Industries expects
that its 2014 after-tax operating income [EBIT(1 – T)] will be $410
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 6.5% annually. Assume that its free
cash flow occurs...

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