Quantitative Problem 2: Hadley Inc. forecasts the year-end free cash flows (in m
ID: 2709930 • Letter: Q
Question
Quantitative Problem 2: Hadley Inc. forecasts the year-end free cash flows (in millions) shown below. Year 1 2 3 4 5 FCF -$22.24 $38.7 $43.4 $51.1 $55.5 The weighted average cost of capital is 12%, and the FCFs are expected to continue growing at a 3% 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 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 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.
Explanation / Answer
Answer: First, find the horizon, or terminal, value:
HV5 = FCF5(1 + g)/(WACC – g) = $55.5(1.03)/(0.12 – 0.03) = $635.17
Then find the PV of the free cash flows and the horizon value:
Value of stock today=$466.2483 million/18 million share outstanding
=$25.90
Year FCF P.V.F (12%) PV ($) 1 -22.24 0.893 -19.8603 2 38.7 0.797 30.8439 3 43.4 0.712 30.9008 4 51.5 0.636 32.754 5 55.5 0.567 31.4685 5 635.17 0.567 360.1414 Tota; value of operations 466.2483