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. 

Charles Underwood Agency Inc. has an expected net operating profit after taxes, EBIT(1 - T), of $14,200 million in the coming year. In addition, the firm is expected to have net capital expenditures of $2,130 million, and net operating working capital (NOWC) is expected to increase by $35 million How much free cash flow (FCF) is Charles Underwood Agency Inc. expected to generate over the next year? 

$16,295 million 

$288,976 million 

$12,105 million 

$12,035 million 

Charles Underwood Agency Inc.'s FCFs are expected to grow at a constant rate of 3.54% per year in the future. The market value of Charles Underwood Agency Inc.'s outstanding debt is 576,494 million, and its preferred stocks' value is $42,496 million. Charles Underwood Agency Inc. has 525 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 10.62% .

Answer 1

EBIT(1-t) = $14,200

Less: Net Capital expenditure = $2,130

Net operating working capital = $35 million

Free cash flow = $12,035 million

Value of firm is equal to the present value of all future free cash flows

= 12,035/(10.62%-3.54%)

= $169,985.88 million

Less: Value of Debt = $76,494 million

Less: Value of preferred Stock = $42,496 million

Value of Common Equity = $50,995.88 million

Number of shares = 525 million

Intrinsic value per share = $97.14