Question

4. Corporate valuation model The corporate valuation model, the price-to-earings (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 Gadget Twin Inc. has an expected net operating profit after taxes, EBIT(I-T), of $12,600 million in the coming year. In addition, the firm is expected to have net capital expenditures of $1,890 million, and net operating working capital (NOWC) is expected to increase by $40 million. How much free cash flow (FC) is Gadget Twin Inc. expected to generate over the next year? 514,450 million $255,201 million $10,670 million $10.750 million Gadget Twin Inc. C are expected to grow at a constant rate of 3.54% per year in the future. The market value of Gadget Twin Inc.'s outstanding det 567,315 million, and its preferred stocks' value is $37,677 milion Gadget Twin Inc. has 600 milion shares of common stock outstanding and its weighted average cost of capital (WACC) equals 10.625 Term Value (Millions) Total from value Itse value of common equity In v alue per share

Answer 1

1). Expected FCF =  [EBIT(1 - Taxes)] + Depreciation & Amortization - Capex – Change in Working Capital

= 12,600 + 0 - 1,890 - 40 = $10,670 million,

Hence, 3rd option is correct.

2-a). Total Firm Value = Expected FCF / [WACC - g]

= 10,670 / [0.1062 - 0.0354] = 10,670 / 0.0708 = $150,706.21 million

So, 4th option is correct.

2-b). Intrinsic Common Equity Value = Total Firm Value - Market Value of Debt - Market Value of Preferred Stock

= 150,706.21 - 67,818 - 37,677 = $45,211.21 million

So, 3rd option is correct.

2-c). Intrinsic Value per share = Intrinsic Common Equity Value / Common Stock Outstanding

= 45,211.21 / 600 = $75.35

So, 3rd option is correct.