Question

09: Assignment - Stocks and Their Valuation Tropetech Inc. has an expected net operating profit after taxes, EBIT(1 -T), of $16,300 million in the coming year. In addition, the firm is expected to have net capital expenditures of $2,445 million, and net operating working capital (NOWC) is expected to increase by $50 million. How much free cash flow (FCF) is Tropetech Inc. expected to generate over the next year? $331,476 million $13,905 million $13,805 million $18,695 million Tropetech Inc.'s FCFs are expected to grow at a constarate of 3.54% per vear in the future. The market value of Tropetech Inc.'s outstanding debt is $87,744 million, and its preferred stocks' value is 548,746 million. Tropetech Inc. has 750 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 10.62%. Term Value (Millions) Total firm value Intrinsic 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

EBIT(1-t) = $ 16300 million, Net Capital Expenditure = Capital Expenditure - Depreciation = $ 2445 million and NOWC = $ 50 million

FCFF = EBIT(1-t) - Net Capital Expenditure - NOWC = 16300 - 2445 - 50 = $ 13805 million

Hence, the correct option is (c)

Perpetual Growth Rate = g = 3.54 % and WACC = 10.62 %

Therefore, Total Firm Value = 13805 / (WACC - g) = 13805 / (0.1062 - 0.0354) = $ 194985.876

Market Value of Debt = $ 87744 million and Preferred Stock = $ 48746 million

Intrinsic Value of Equity = 194985.876 - 87744 - 48746 = $ 58495.876 million

Number of Shares Outstanding = 750 million

Intrinsic Value Per Share = 58945.876 / 750 = $ 77.99