What is the estimated value of free cash flow

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1. A stock market analyst is evaluating the common stock of Hiers Family Corporation. (HFC). She estimates that the company's operating income (EBIT) for the next year will be $640 million. Furthermore, she predicts that next year HFC will require $160 million in capital expenditures and depreciation expense will be $32 million, so net capital expenditures for next year will be $128 million. Changes in net operating working capital (NOWC) for next year are expected to be $12 million. Free cash flow is expected to grow at a constant annual rate of 4% a year and the company's WACC is 8%. The company has $190 million of debt (market value equals book value), $85 million of preferred stock (market value equals book value), and it has 125 million shares of common stock. The firm's tax rate is 25%.

a. What is the estimated value of free cash flow the first year? (That is, what is FCF1?)

b. Using the free cash flow valuation method, what is its expected stock price today?

Reference no: EM132790987

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