Question

11. More on the corporate valuation model Aa Aa E Extensive Enterprise Inc. is expected to generate a free cash flow (FCF) of $10,760.00 million this year (FCF1 = $10,760.00 million), and the FCF is expected to grow at a rate of 20.20% over the following two years (FCF2 and FCF3). After the third year, however, the FCF is expected to grow at a constant rate of 2.46% per year, which will last forever (FCF4). If Extensive Enterprise Inc.'s weighted average cost of capital (WACC) is 7.38%, what is the current total firm value of Extensive Enterprise Inc.? O O O O $354,329.17 million $295,274.31 million $33,793.31 million $357,543.72 million Extensive Enterprise Inc.'s debt has a market value of $221,456 million, and Extensive Enterprise Inc. has no preferred stock. If Extensive Enterprise Inc. has 525 million shares of common stock outstanding, what is Extensive Enterprise Inc.'s estimated intrinsic value per share of common stock? $140.61 0 $421.82 $154.67 $139.61

Answer 1

11)
	FCF1	10760
	g1	20.20%
	FCF2	12933.52
	FCF3	15546.09
	Find the present value of the firm in year 3
	g2	2.46%
	FCF4	15546.09*(1+.0246)
	FCF4	15928.52
	The following is the method to calculate the present value of a growing perpetuity.
	Present value in year 3 = FCF4/(R-g2)
	R is the cost of capital that is 7.38%.
	Present value in year 3	15928.52/(.0738 - .0246)
	Present value in year 3	323750.51
	Cash flow in year 3	Present value in year 3 + FCF3
	Cash flow in year 3	323750.51+15546.09
	Cash flow in year 3	339296.60
	The current total firm value = sum of present value of future cash flows.
	Using R = .0738
	Year	1	2	3
	Cash flow	10760	12933.52	339296.60
	Present value	10020.49	11216.82	274037.06
	sum of present values	295274.38
	The current total firm value is $295274.31
	Estimated intrinsic value per share of common stock = Market value/Number of shares of common stock outstanding
	Estimated intrinsic value per share of common stock = 221456 million/525 million.
	Estimated intrinsic value per share of common stock = 421.82.
	The estimated intrinsic value per share of common stock is $421.82.