Quantitative Problem part 1 Assume today is December 31 2013

Quantitative Problem part 1: Assume today is December 31, 2013. Barrington Industries expects that its 2014 after-tax operating income [EBIT(1 – T)] will be $440 million and its 2014 depreciation expense will be $65 million. Barrington\'s 2014 gross capital expenditures are expected to be $120 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 5% annually. Assume that its free cash flow occurs at the end of each year. The firm\'s weighted average cost of capital is 8.2%; the market value of the company\'s debt is $2 billion; and the company has 190 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.
$ per share

Quantitative Problem part 2: Hadley Inc. forecasts the year-end free cash flows (in millions) shown below.

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 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

Year	1	2	3	4	5
FCF	-$22.39	$37.3	$43.2	$52.6	$56.4

Solution

2-

Expected free cash flow in year 6

56.4*1.04

58.656

terminal value of firm

expected free cash flow/(WACC-growth rate)

58.656/(9%-4%)

1173.12

Year

free cash flow

present value of free cash flow = free cash flow/(1+WACC)^n WACC = 9%

1

-22.39

-20.5413

2

37.3

31.39466

3

43.2

33.35833

4

52.6

37.26317

5

56.4

36.65613

5

1173.12

762.4475

present value of company

880.5785

less market value of debt

26

value of shares

854.5785

no of shares

20

value per share

42.73

1-

Free cash flow

operating profit after tax + depreciation-change in working capital-capital expenditure

440+65-30-120

355

Expected free cash flow

355*1.05

372.75

value of firm

expected free cash flow/(WACC-growth rate)

372.75/(8.2%-5%)

11648.44

value of debt

2000

value of shares

9648.438

no of shares

190

value per share

9648.438/190

50.78

2-	Expected free cash flow in year 6	56.4*1.04	58.656
	terminal value of firm	expected free cash flow/(WACC-growth rate)	58.656/(9%-4%)	1173.12
	Year	free cash flow	present value of free cash flow = free cash flow/(1+WACC)^n WACC = 9%
	1	-22.39	-20.5413
	2	37.3	31.39466
	3	43.2	33.35833
	4	52.6	37.26317
	5	56.4	36.65613
	5	1173.12	762.4475
	present value of company		880.5785
	less market value of debt		26
	value of shares		854.5785
	no of shares		20
	value per share		42.73
1-	Free cash flow	operating profit after tax + depreciation-change in working capital-capital expenditure	440+65-30-120	355
	Expected free cash flow	355*1.05	372.75
	value of firm	expected free cash flow/(WACC-growth rate)	372.75/(8.2%-5%)	11648.44
	value of debt			2000
	value of shares			9648.438
	no of shares			190
	value per share	9648.438/190		50.78