Quantitative Problem 2: Hadley Inc. forecasts the year-end free cash flows (in m

Question

Quantitative Problem 2: Hadley Inc. forecasts the year-end free cash flows (in millions) shown below.

The weighted average cost of capital is 10%, and the FCFs are expected to continue growing at a 4% 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 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.

Year 1 2 3 4 5 FCF -$22.79 $38.3 $43.4 $51.5 $55.5

Explanation / Answer

Total value of firm = $ 710.5044 million

Value of Equity = Value of firm – value of debt

                                = 710.5044 – 24

                                = 686.5044

Price per each share = Value of equity/ no of shares

                                                = 686.5044/18

                                                = $ 38.14

Year FCF Discounted FCF 1 ($22.79) -20.72 2 $38.30 31.65 3 $43.40 32.61 4 $51.50 35.18 5 $55.50 34.46 Terminal CF 597.33 Total Value 710.5044

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