Quantitative Problem 1: Assume today is December 31, 2013. Barrington Industries
ID: 2710013 • Letter: Q
Question
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 $70 million. Barrington's 2014 gross capital expenditures are expected to be $100 million and the change in its net operating working capital for 2014 will be $20 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 8.4%; the market value of the company's debt is $2.6 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)? Round your answer to the nearest cent. Do not round intermediate calculations. $____per share
Explanation / Answer
Market value of the firm = Market Value of firm's Equity + Market Value of firm's Debt
MVF = MVE + MVD
Here : MVD = 2.6 billion
MVF = Present value of free cash flows (FCFF) discounted at WACC
FCFF = EBIT (1-t) + Depreciation - FCInv - WCInv
from the given values :
(FCFF)2014= 450 + 70 - 100 - 20 = 400 million
FCFF growth rate (g) = 4.5 %
WACC = 8.4 %
(Value of Firm)2013 = (FCFF)2014 / (WACC - g)
= 400 / (0.084 - 0.045 )
= 10256.4103 million
Value of Equity = 10256.4103 - 2600 = $ 7656.41026 million
outstanding shares = 180 million
So , Value of share = 7656.41026 / 180 = 42.5356
Stock price = $ 42.5356