Question

Hadley Inc. forecasts the year-end free cash flows (in millions) shown below.

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

FCF | -$22.54 | $37.9 | $44 | $52.6 | $56.2 |

The weighted average cost of capital is 9%, and the FCFs are expected to continue growing at a 4% rate after Year 5. The firm has $26 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.

Answer #1

FCF1 = -$22.54

FCF2 = $37.90

FCF3 = $44.00

FCF4 = $52.60

FCF5 = $56.20

WACC = 9%

Constant Growth Rate, g = 4%

FCF6 = $56.20 * 1.04 = $58.448

Value of Firm at the end of Year 5, V5 = FCF6 / (WACC - g)

Value of Firm at the end of Year 5, V5 = $58.448 / (0.09 -
0.04)

Value of Firm at the end of Year 5, V5 = $1,168.96 million

Current Value of Firm = -$22.54/1.09 + $37.90/1.09^2 +
$44.00/1.09^3 + $52.60/1.09^4 + $56.20/1.09^5 +
$1,168.96/1.09^5

Current Value of Firm = $878.73 million

Value of Equity = Current Value of Firm - Value of Debt

Value of Equity = $878.73 million - $26 million

Value of Equity = $852.73 million

Price per share = Value of Equity / Number of shares
outstanding

Price per share = $852.73 million / 19 million

Price per share = $44.88

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