Please help me solve. Quantitative Problem 2: Hadley Inc. forecasts the year-end
ID: 2782424 • Letter: P
Question
Please help me solve.
Quantitative Problem 2: Hadley Inc. forecasts the year-end free cash flows (in millions) shown below Year FCF $22.14 $37.5 $43.3 $52.3 $55.4 The weighted average cost of capital is 10%, and the FCFs are expected to continue growing at a 3% rate after Year 5. The firm has $24 million of market value debt, but it has no preferred stock or any other outstanding claims. There are 21 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. The statement above is-Select-Explanation / Answer
Answer a.
FCF1 = -$22.14
FCF2 = $37.50
FCF3 = $43.3
FCF4 = $52.3
FCF5 = $55.4
Constant growth rate, g = 3%
WACC = 10%
FCF6 = $55.4 * 1.03
FCF6 = $57.062
Value of firm at the end of Year 5, V5 = FCF6 / (WACC - g)
Value of firm at the end of Year 5, V5 = $57.062 / (0.10 - 0.03)
Value of firm at the end of Year 5, V5 = $815.17
Current Value of firm, V0 = -$22.14/1.10 + $37.50/1.10^2 + $43.30/1.10^3 + $52.30/1.10^4 + $55.40/1.10^5 + $815.17/1.10^5
Current Value of firm, V0 = $619.67
So, current value of firm is $619.67 million
Value of Equity = Value of Firm - Value of Debt
Value of Equity = $619.67 million - $24.00 million
Value of Equity = $595.67 million
Value of Stock Price = Value of Equity / Number of shares outstanding
Value of Stock Price = $595.67 million / 21 million
Value of Stock Price = $28.37
Answer b.
False, the value of stock is not assigns according to the holding period rather it is assigned assuming the stocks are hold forever.