Question

4. Corporate valuation model The corporate valuation model, the price to earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you've done in previous problems, but it focuses on a firm's free cash flows (FCFS) instead of its dividends. Some firms don't pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model Tropetech Inc. has an expected net operating profit after taxes, EBIT(1-T), of $9,200 million in the coming year. In addition, the firm is expected to have net capital expenditures of $1,380 million, and net operating working capital (NOWC) is expected to increase by $30 million. How much free cash flow (FCF) is Tropetech Inc. expected to generate over the next year? $7,850 million $155,434 million $7,790 million $10,550 million Tropetech Inc.'s FCs are expected to grow at a constant rate of 4.26% per year in the future. The market value of Tropetech Inc.'s outstanding debt is $41,144 million, and its preferred stocks' value is $22,858 milion. Tropetech Inc. has 450 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 12.78%. Term Value (Millions) Total firm value Intrinsic value of common equity Intrinsic value per share

Answer 1

1: Option 3

Free cash flow= EBIT*(1-Tax)-increase in fixed assets-increase in working capital

= 9200-1380-30

= $7790 million

2: Firm value = FCF/(k-g)

= 7790/(12.78%-4.26%)

= 91431.92 m

3: value of common equity= firm value-debt-the preferred stock

= 91431.92-41144-22858

= 27429.92

4: intrinsic value per share= Value of common equity/number of outstanding shares

= 27429.92/450 = 60.96