Final answer:
The stock price of Hadley Inc. is calculated by discounting the free cash flows at the cost of capital, calculating terminal value with perpetual growth, and adjusting for the number of shares and market-value debt.
Step-by-step explanation:
To calculate the value of Hadley Inc.'s stock price today (year 0), we need to discount the projected free cash flows (FCFs) to their present value (PV) at the given weighted average cost of capital (WACC) of 9%, and then adjust for perpetual growth post-year 5. For years 1 through 5, we use the formula: PV = FCF / (1 + WACC)year. For cash flows beyond year 5, we use the Gordon Growth Model to calculate the terminal value (TV), using the formula: TV = FCF5 x (1 + growth rate) / (WACC - growth rate). We discount this terminal value back to its present value at the end of year 5, and then sum the present values of the cash flows for years 1 through 5 with the present value of the terminal value to calculate the total enterprise value (EV). To find the equity value, we subtract the market-value debt from the EV, then divide by the number of shares outstanding to determine the stock price. As this is a hypothetical exercise, the calculations will provide a theoretical stock price based on the given data and assumptions.
- Calculate individual PVs for the FCFs for years 1-5.
- Calculate terminal value using Gordon Growth Model and discount it to PV.
- Calculate total enterprise value by summing the PVs of the cash flows and the PV of the terminal value.
- Subtract the market-value debt from total enterprise value to find equity value.
- Divide the equity value by the number of shares outstanding for stock price.