Assume today is December 31, 2013. Barrington Industries expects that its 2014 after-tax operating income [EBIT(1 – T)] will be $450 million and its 2014 depreciation expense will be $60 million. Barrington's 2014 gross capital expenditures are expected to be $100 million and the change in its net operating working capital for 2014 will be $25 million. The firm's free cash flow is expected to grow at a constant rate of 4.5% annually. Assume that its free cash flow occurs at the end of each year. The firm's weighted average cost of capital is 8.3%; the market value of the company's debt is $2.45 billion; and the company has 190 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

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Answer:

Company’s stock price today (December 31, 2013) is $ 40.43

Explanation:

Free cash flow = EBIT*(1-T)+DE-WCC-CE

EBIT = Earning Before Interest and Taxes

T=Tax rate

EBIT*(1-T) = $450million

DE=Depreciation expenses = $60million

WCC=Working capital change = $25 million

CE=Capital expenditure = $100 million

Free cash Flow(FCF) in 2014=(450+60-25-100)

                                           = $385million

Growth rate of FCF =  4.5%

                                = 0.045

Weighted average cost of capital(WACC) = 8.3%

                                                                     =0.083

Present Value(PV) of Free Cash Flow=FCF/(R-g)

R=required rate of return = WACC

                                        =0.0843

G=Growth rate of FCF=0.045

Present value of FCF=(385/(0.083-0.045))

                                  = 385 / 0.038

                                  = $ 10,131.58 million

Value of Equity +Value of Debt = Present value of FCF

                                                 = $ 10,131.58 million

Value of Equity = $10,131.58 million-$2450 million

                          = $ 7,681.58 million

Number of common shares outstanding=190 million

Company’s stock price today (December 31, 2013)=(7681.58/190

                                                                                    )= $ 40.43