Assume today is December 31, 2013. Barrington Industries expects that its 2014 a
ID: 2741769 • Letter: A
Question
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 $60 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 $25 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 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.
Explanation / Answer
Caluculation of companies stock price today(31.12.2013):
Free cash flow valuation defines the value of the firm to be the present value of its expected future cash flow discounted at the company's cost of capital . Free cash flow available to the firm (FCFF) is what remaining with the company after payment of interest to the debt holders as per their contractually obligated payments. i.e, Interest.
FCFF = NOP + DEPRECIATION - NET INVESTMENT - NET CHANGE IN WORKING CAPITAL.
Given Data in the above problem.
Net operating profit = $400 million
Depreciation = $60 million
Gross capital expenditure = $100 million
Change in net operating working capital = $25 million
WACC = 8.5% , Growth rate = 4.5%, Market value of debt = $2 billoin or $200 millon.
FCFF = $[440 + 60 - 100 - 25] ,
FCFF = $375.
Firm value = [FCFFo (1+g) / (WACC-g ) ]
= [$375(1+0.045) / (8.5% - 4.5%)]
Firm value = $9796.875 million
The value of companie's stock price is the firm value minus value of debt minus prefered stock divided by the shares of common stock outstanding.
Companies stock price = ($9796.875 - 200 - 0.) millon / 180 million
Companies stock price = $53.32.