Question

Quantitative Problem 1: Assume today is December 31, 2016. Barrington Industries expects that its 2017 after-tax operating income (EBIT(1 -T)] will be $450 million and its 2017 depreciation expense will be $65 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 $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 at the end of each year. The firm's weighted average cost of capital is 8.7%; the market value of the company's debt is $2.5 billion; and the company has 180 million shares of common stock outstanding. The firm has no preferred stock on its balance sheet and has 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 - $22.25 $37.5 $43.8 $51.8 $55.9 The weighted average cost of capital is 10%, and the FCFs are expected to continue growing at a 4% rate after Year 5. The firm has $24 million of market value debt, but it has no preferred stock or any other outstanding claims. There are 20 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 true 9

Answer 1

EBIT(1-t) = $450

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

Less: Capital expenditure = $120

Change in Net operating working capital = $30 million

Free cash flow = $365 million

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

= 365/(8.7%-4.5%)

= $8,690.48 million

Less: Value of Debt = $2,500 million

Value of Common Equity = $6,190.48 million

Number of shares = 180 million

Intrinsic value per share = $34.39

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

= -22.25/(1.1) + 37.5/(1.1)^2 + 43.8/(1.1)^3 + 51.8/(1.1)^4 + 55.9/(1.1)^5 + 55.9(1.04)/(1.1)^5 (10%-4%)

= $715.39

Per share price = (715.39-24)/20 = $34.57 per share

TRUE