Question

Assume today is December 31, 2019. Barrington Industries expects that its 2020 after-tax operating income [EBIT(1 – T)] will be $430 million and its 2020 depreciation expense will be $65 million. Barrington's 2020 gross capital expenditures are expected to be $110 million and the change in its net operating working capital for 2020 will be $30 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 8.8%; the market value of the company's debt is $2.85 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. Also, the firm has zero non-operating assets. Using the corporate valuation model, what should be the company's stock price today (December 31, 2019)? Do not round intermediate calculations. Round your answer to the nearest cent. $ per share

Answer 1

EBIT(1-t) = $430 million

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

Less: Capital expenditure = $110 million

Change in Net operating working capital = $30 million

Free cash flow = $355 million

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

= 355/(8.8%-5%)

= $9,342.11 million

Less: Value of Debt = $2,850 million

Value of Common Equity = $6,492.11 million

Number of shares = 170 million

Intrinsic value per share = $38.1888

i.e. $38.19 per share