Question

Hadley Inc. forecasts the year-end free cash flows (in millions) shown below. Year 1 2 3 4 5 FCF -$22.68 $39 $43.6 $51.1 $56.5 The weighted average cost of capital is 12%, and the FCFs are expected to continue growing at a 4% rate after Year 5. The firm has $25 million of market-value debt, but it has no preferred stock or any other outstanding claims. There are 19 million shares outstanding. Also, the firm has zero non-operating assets. What is the value of the stock

Answer 1

The value of the stock is $44.15 million.

Step-by-step explanation:

To calculate the value of the stock, we need to calculate the present value of the free cash flows (FCFs) and the terminal value. The formula for calculating the present value of FCFs is:

FCF1 / (1 + WACC) + FCF2 / (1 + WACC)^2 + ... + FCFt / (1 + WACC)^t

Using the given FCFs and the weighted average cost of capital (WACC) of 12%, we can calculate the present value of FCFs:

• FCF1: -$22.68 / (1 + 0.12) = -$20.21 million
• FCF2: $39 / (1 + 0.12)^2 = $29.74 million
• FCF3: $43.6 / (1 + 0.12)^3 = $29.94 million
• FCF4: $51.1 / (1 + 0.12)^4 = $31.37 million
• FCF5: $56.5 / (1 + 0.12)^5 = $31.37 million

The terminal value can be calculated using the formula:

FCFt+1 / (WACC - g)

Where FCFt+1 is the FCF at the end of Year 5 and g is the growth rate of FCFs (4%).

FCFt+1 = $56.5 * (1 + 0.04) = $58.76 million

Terminal value = $58.76 / (0.12 - 0.04) = $735.50 million

The total value of the stock is the sum of the present value of FCFs and the terminal value:

Total value = -$20.21 + $29.74 + $29.94 + $31.37 + $31.37 + $735.50 = $838.71 million

Finally, we divide the total value by the number of shares outstanding ($838.71 million / 19 million shares) to get the value per share:

Value per share = $44.15

Therefore, the value of the stock is $44.15 million.