Hadley Inc. forecasts the year-end free cash flows (in millions) shown below. Th
ID: 2617215 • Letter: H
Question
Hadley Inc. forecasts the year-end free cash flows (in millions) shown below.
The weighted average cost of capital is 9%, and the FCFs are expected to continue growing at a 4% rate after Year 5. The firm has $26 million of market-value debt, but it has no preferred stock or any other outstanding claims. There are 19 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 -$22.54 $37.9 $44 $52.6 $56.2Explanation / Answer
FCF1 = -$22.54
FCF2 = $37.90
FCF3 = $44.00
FCF4 = $52.60
FCF5 = $56.20
WACC = 9%
Constant Growth Rate, g = 4%
FCF6 = $56.20 * 1.04 = $58.448
Value of Firm at the end of Year 5, V5 = FCF6 / (WACC - g)
Value of Firm at the end of Year 5, V5 = $58.448 / (0.09 - 0.04)
Value of Firm at the end of Year 5, V5 = $1,168.96 million
Current Value of Firm = -$22.54/1.09 + $37.90/1.09^2 + $44.00/1.09^3 + $52.60/1.09^4 + $56.20/1.09^5 + $1,168.96/1.09^5
Current Value of Firm = $878.73 million
Value of Equity = Current Value of Firm - Value of Debt
Value of Equity = $878.73 million - $26 million
Value of Equity = $852.73 million
Price per share = Value of Equity / Number of shares outstanding
Price per share = $852.73 million / 19 million
Price per share = $44.88
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