Question

5. More on the corporate valuation model

Omni Consumer Products Co. is expected to generate a free cash flow (FCF) of $4,560.00 million this year (FCF₁ = $4,560.00 million), and the FCF is expected to grow at a rate of 22.60% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 3.18% per year, which will last forever (FCF₄). Assume the firm has no nonoperating assets. If Omni Consumer Products Co.’s weighted average cost of capital (WACC) is 9.54%, what is the current total firm value of Omni Consumer Products Co.? (Note: Round all intermediate calculations to two decimal places.)

$118,363.12 million

$125,231.53 million

$98,635.93 million

$14,036.72 million

Omni Consumer Products Co.’s debt has a market value of $73,977 million, and Omni Consumer Products Co. has no preferred stock. If Omni Consumer Products Co. has 450 million shares of common stock outstanding, what is Omni Consumer Products Co.’s estimated intrinsic value per share of common stock? (Note: Round all intermediate calculations to two decimal places.)

$60.28

$53.80

$54.80

$164.39

Answer 1

Solution: Year FCF FCF calculation PV 1 4,560.00 5,590.56 4560*1.226 6,854.03 5590.56*1.226 111,194.78 ** discount factor at 9.54%* b 0.91291 0.83340 0.76082 0.76082 current total firm value 3 4,162.86 4,659.18 5,214.68 84,599.19 98,635.92 V3** **Since growth is constant after year 3, V3=FCF4/(r-g) 6854.03*1.0318/(0.0954-0.0318) 111,194.78 V3= Value at the end of year 3 FCF4= FCF at the end of year 4 g=growth rate *discount rate formula = 1/(1+r)^n b) current total firm value Less : debt value of equity / number of shares outstanding Interinsic value 98,635.92 - 73,977.00 24,658.92 450.00 54.80