Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Quantitative Problem 1: Assume today is December 31, 2019. Barrington Industries expects that its 2020 after-tax operating income [EBIT(1 – T)] will be $410 million and its 2020
$ per share
Quantitative Problem 2: Hadley Inc.
| Year | 1 | 2 | 3 | 4 | 5 |
| FCF | -$22.32 | $37.5 | $43.5 | $51.1 | $56.6 |
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. Also, the firm has zero non-operating assets. 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
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Step 1
Answer -
Part 1 -
Calculation of Total Firm Value :
| Particulars | Amount |
| EBIT(1-T) | $ 410 |
| Add: Depreciation | $ 70 |
| Less: Gross Capital Expenditure | $ 120 |
| Less : Increase in Net Operating Working capital | $ 30 |
| Free cash flow | $ 330 |
Firm Value = Free cash flow next year/(WACC – growth rate)
= 330 /(8.5 % - 4.5 %)
= $8250 million
| Value of Firm | $8250 |
| Debt of Firm | $2150 |
| Value of Equity | $ 6100 |
Therefore, Price Per Shares = ( $6100 / 190) = $ 32.10
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