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 depreciation expense will be $70 million. Barrington's 2020 gross capital expenditures are expected to be $120 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 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 8.5%; the market value of the company's debt is $2.15 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. 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 Quantitative Problem 2: Hadley Inc. forecasts the year-end free cash flows (in millions) shown below. 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
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 depreciation expense will be $70 million. Barrington's 2020 gross capital expenditures are expected to be $120 million and the change in its net operating working capital for 2020 will be $30 million. The firm's
$ 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
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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