Question

11. More on the corporate valuation model ABC Telecom Inc. is expected to generate a free cash flow (FCF) of $1,240.00 million this year (FCF, = $1,240.00 million), and the FCF is expected to grow at a rate of 20.20% over the following two years (FCF, 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 (FCF.). Assume the firm has no nonoperating assets. If ABC Telecom Inc.'s weighted average cost of capital (WACC) is 7.38%, what is the current total firm value of ABC Telecom Inc.? (Note: Round all intermediate calculations to two decimal places.) O $41,203.96 million O $40,833.52 million O $3,894.41 million O $34,027.93 million ABC Telecom Inc.'s debt has a market value of $25,521 million, and ABC Telecom Inc. has no preferred stock. If ABC Telecom Inc. has 525 million shares of common stock outstanding, what is ABC Telecom Inc.'s estimated intrinsic value per share of common stock? (Note: Round all intermediate calculations to two decimal places.) O $48.61 O $17.82 O $16.20 O $15.20

ABC Telecom Inc. is expected to generate a free cash flow (FCF) of $1,240.00 million this year (FCF₁ = $1,240.00 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). Assume the firm has no nonoperating assets. If ABC Telecom Inc.’s weighted average cost of capital (WACC) is 7.38%, what is the current total firm value of ABC Telecom Inc.? (Note: Round all intermediate calculations to two decimal places.)

ABC Telecom Inc.’s debt has a market value of $25,521 million, and ABC Telecom Inc. has no preferred stock. If ABC Telecom Inc. has 525 million shares of common stock outstanding, what is ABC Telecom Inc.’s estimated intrinsic value per share of common stock? (Note: Round all intermediate calculations to two decimal places.)

Answer 1

A) Next FCF = Current FCF x (1 + Growth rate) [$1031.61397670549 x 120.2%] Year-1's FCF Year-2's FCF Year-3's FCF Year-4's FCF $1,240.00 $1,490.48 ($1240 x 120.20%] $1,791.56 ($1490.48 x 120.20%] $1,835.63 ($1791.56 x 102.46%] PV of perpetual FCFs in year-3 (Horizon value) = Year-4's FCFs / (Required return rate - Perpetual growth rate) Year-4's FCFS $1,835.63 [As calculated above] Perpetual growth rate 2.46% [Given that growth rate will remain constant from year-4 onwards] Required return rate 7.38% [Firm's weighted average cost of capital] Horizon value in year-3 $37,309.5378 ($1835.6293/(7.38% - 2.46%) = $1835.6293 / 4.92% = $1835.6293 / 0.0492 = $37309.5378] Therefore, 1 2 3 $1,240.00 Year Annual FCFS Horizon value Total cash flows (1) PV Factor @ 7.38% (2) Present Value (1) x (2) $1,240.00 0.931272 $1,154.78 $1,490.48 $1,791.56 [As calculated above] $37,309.5378 [As calculated above] $1,490.48 $39,101.0948 0.867268 0.807662 [1/(1+7.38%)*; 1/(1+7.38%)*; 1/(1+7.38%)?] $1,292.65 $31,580.48

Value of the firm today present value from year-1 and 3] $34,027.90 [Sum --> Option-(d) B) Value of the firm today $34,027.90 [As calculated in Part-A] Less: Debt's market value $25,521.00 Common stock value $8,506.90 --> As there are no preferred stocks] Common shares outstanding 525 Intrinsic value per share $16.20 [$8506.90 / 525 shares] --> Option-(c)