Assume today is December 31, 2013. Barrington Industries expects that its 2014 a
ID: 2768689 • 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 $110 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 8.4%; the market value of the company's debt is $2.35 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.
Explanation / Answer
Step1: Computation of the free cash flow.We have,
Step2: Computation of the market value of the free cash flow.We have,
Cost of capital = 8.4%
Growth rate = 4.5%
Market value of free cash flow = Free cash flow(1+growth rate)/ (Cost of capital- Growth rate)
Market value of free cash flow = 415(1.045)/ (0.084 - 0.045)
Market value of free cash flow = 11,119.87 million
Step3: Computation of the total value of the firm.We have,
Total value of the firm = Market value of free cash flow + Market value of the debt
Total value of the firm = 11,119.87 + 2,350 = $ 13,469.87 million
Step4: Computation of the stock price.We have,
Stock price = Total value of the firm / Number of common shares
Stock price = 13,469.87 / 180 = $ 74.83
Hence,company's stock price today is $ 74.83
Particulars Amount in million($) EBIT(1-T) 440 Add: Depreciation expenses 60 Add: Net working capital 25 Less: Capital expenditures (110) Free cash flow 415