Question

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 at the end of each year. The firm's weighted average cost of capital is 8%; the market value of the company's debt is $2.75 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.

Answer 1

EBIT (1-T) = $410 million

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

Less: Capital Expenditures = $100 million

Less: Change in Net Operating Working Capital = $30 million

Free cash Flow of 2014 = $340 million

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

= 340 million/(8%-6.5%)

= $22,666.67 million

Value of firm = $22,666.67 million

Less: Value of Debt = 2,750 million

Value of Equity = $19,916.67 million

Number of Shares outstanding = 170 million

Stock price today = 19,916.67 million/170 million

= $117.16