Fill This Form To Receive Instant Help

Help in Homework
trustpilot ratings
google ratings


Homework answers / question archive / Quantitative Problem 1: Assume today is December 31, 2013

Quantitative Problem 1: Assume today is December 31, 2013

Finance

Quantitative Problem 1: Assume today is December 31, 2013. Barrington Industries expects that its 2014 after-tax operating income [EBIT(1 – T)] will be $450 million and its 2014 depreciation expense will be $60 million. Barrington's 2014 gross capital expenditures are expected to be $110 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 6% annually. Assume that its free cash flow occurs at the end of each year. The firm's weighted average cost of capital is 8.9%; the market value of the company's debt is $2 billion; and the company has 180 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)? Do not round intermediate calculations. Round your answer to the nearest cent.
$   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 -$22.65 $37.1 $43.9 $52.7 $55.4

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 $24 million of market-value debt, but it has no preferred stock or any other outstanding claims. There are 18 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

pur-new-sol

Purchase A New Answer

Custom new solution created by our subject matter experts

GET A QUOTE

Answer Preview

Solution to the FIRST QUETSION

 

Step-1, Free Cash Flow (FCF)

Free Cash Flow (FCF) = Net Operating Profit After Tax(NOPAT) + Depreciation Expenses - Capital Expenditures – Changes in Net Working Capital

=EBIT(1 – Tax Rate) + Depreciation - Capital Expenditures – Changes in Net Working Capital

= $450 Million + $60 Million - $110 Million – $25 Million

= $375 Million

 

Step-2, Total Firm Value

Weighted Average Cost of Capital (WACC) = 8.90%

Growth Rate (g) = 6.00%

Therefore, the Total Firm Value = FCF / (WACC – g)

= $375 Million / (0.0890 – 0.06)

= $375 Million / 0.0290

= $12,931.03 Million

 

Step-3, Value of Common Equity

Value of Common Equity = Total Firm Value - Market Value of Debt

= $12,931.03 Million - $2,000 Million

= $10,931.03 Million

 

Step-4, Stock price today

The Stock price today = Value of Common Equity / Number of shares of common stock outstanding

= $10,931.03 Million / 180 Million common shares outstanding

= $60.73 per share

 

Hence, the company's stock price today will be $60.73.