CASTS for 5 to 10 years, alter which it is assumed that the final forecasted free cash How will grow at some long-run constant rate. Once the firm reaches its horizon date, when cash flows begin to grow at a constant rate, the equation to calculate the continuing value of the firm at that date is: Horinon value = Vompany at 1 = FCFH/(WACC-Ecu) Discount the free cash flows back at the firm's weighted average cost of capital to arrive at the value of the firm today. Once the value of the firm is calculated, the market value of debt and preferred are subtracted to arrive at the market value of equity. The market value of equity is divided by the number of common shares outstanding to estimate the firm's intrinsic per-share value, We present 2 examples of the corporate Valuation model in the first problem, we assume that the firm is a mature company so its free cash flows grow at a constant rate. In the second problem, we assume that the firm has a period of nonconstant growth. Quantitative Problem 1: Assume today is December 31, 2013. Barrington Industries expects that its 2014 after-tax operating income (Evrt(1 - 1)] will be $440 million and its 2014 depreciation expense will be $65 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 $30 million. The firm's free cash flow is expected to grow at a constant rate of 5.5% annually, Assume that its free cash flow occurs at the end of each year. The firm's weighted average cost of capital is 8.8%; the market value of the company's debt is $2.95 billion; and the company has 170 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)? Do not round intermediate calculations, Round your answer to the nearest cent. per share Quantitative Problem 2: Hadley Inc. forecasts the year-end free cash flows (in millions) shown below. 1 5 - $22.27 $37.1 $43.5 $52.9 $55.5 The weighted average cost of capital is 10%, and the FCFs are expected to continue growing at a 4% rate after years. The firm has $24 million or 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 O)? 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. 5 2 4 Year FCF The statement above is Select
