Question

Ch 09: Assignment-Stocks and Their Valuation Back to Assignment Attempts: Keep the Highest: 4 Attention: Due to a bug in Google Chrome, this page may not function correctly. Click here to learn more 10. Corporate valuation model A Aa 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. Spandust Industries Inc. has an expected net operating profit after taxes, EBIT(1 - T), of $2,200 million in the coming year. In addition, the firm is expected to have net capital expenditures of $330 million, and net operating working capital (NOWC) is expected to increase by $45 million. How much free cash flow (FCF) is Spandust Industries Inc. expected to generate over the next year? O $1,915 million $39,775 million $1,825 million $2,485 million Spandust Industries Inc.'s FCFs are expected to grow at a constant rate of 3.90% per year in the future. The market value of Spandust Industries Inc.'s outstanding debt is $10,529 million, and its preferred stocks' value is $5,849 million. Spandust Industries Inc. has 675 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 11.70%. Value (Millions) Term Total firm value Value of common equity Intrinsic value per share Using the preceding information and the FCF you calculated in the previous question, calculate the appropriate values in this table. Assume the firm has no nonoperating assets.

Answer 1

Free Cash Flow (FCF)

Free Cash Flow (FCF) = Net Operating Profit After Tax(NOPAT) – Capital Expenditures – Changes in Net Working Capital

=EBIT(1 – Tax Rate) - Capital Expenditures – Changes in Net Working Capital

= $2,200 Million - $330 Million - $45 Million

= $1,825 Million

Total Firm Value

Expected Growth Rate (g) = 3.90% per year

Weighted Average Cost of Capital (WACC) = 11.70%

Total Firm Value = FCF / (WACC – g)

= $1,825 Million / (0.1170 – 0.0390)

= $1,825 Million / .0780

= $23,397.44 Million

Value of Common Equity

Value of Common Equity = Total Firm Value – Market Value of Debt – Market Value of Preferred Stock

= $23,397.44 Million - $10,529 Million - $5,849 Million

= $7,019.44 Million

Intrinsic Value per share

Intrinsic Value per share = Intrinsic Value of Common Equity / Number of shares of common stock outstanding

= $7,019.44 Million / 675 Million shares outstanding

= $10.40 per share