Question

Quantitative Problem 1: Assume today is December 31, 2013. Barrington Industries expects that its 2014 after-tax operating income [EBIT(1 – T)] will be $430 million and its 2014 depreciation expense will be $65 million. Barrington's 2014 gross capital expenditures are expected to be $120 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 at the end of each year. The firm's weighted average cost of capital is 8.3%; the market value of the company's debt is $2.5 billion; and the company has 170 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.
$ 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	-$22.93	$37.7	$43.5	$53	$56.8

The weighted average cost of capital is 9%, and the FCFs are expected to continue growing at a 3% 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.

The statement above is -Select-truefalseCorrect 2 of Item 2.

Answer 1

Calculation of free cash flows:

EBIT(1-T) = $430 million

Add: Depreciation (non-cash expense) = $65 million

Less: Capital Expenditure = $120 million

Less: Change in Net operating working capital = $25 million

Free cash flow = $350 million

Cost of firm = present value of all future free cash flows

= 350/(8.3%-5.5%)

= $12,500 million

Value of firm = $12,500 million

Less: Value of Debt = $2,500 million

Value of Equity = $10,000 million

Number of shares = 170 million

Value per share = 10,000/170

= $58.82

2.Value of firm = -22.93/(1.09) + 37.7/(1.09)² + 43.5/(1.09)³ + 53/(1.09)⁴ + 56.8/(1.09)⁵ + 56.8(1.03)/(9%-3%)*(1.09)⁵

= $752.47 million

Less: Value of Debt = $25 million

Value of Equity = $727.47 million

Number of shares = 21 million

Value per share = 727.47/21

= $34.64 per share

The given statement is TRUE