Question

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.

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?

$13,805 million

$331,476 million

$13,905 million

$18,695 million

Tropetech Inc.’s FCFs are expected to grow at a constant rate of 3.54% per year in the future. The market value of Tropetech Inc.’s outstanding debt is $87,744 million, and its preferred stocks’ value is $48,746 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

Question 1:

FCF = EBIT * (1 - Tax) + Depreciation - NOWC spend - Capex spending

FCF = $16,300 mil + 0 - $50 mil - $2,445 mil

FCF = $13,805 mil

Question 2:

$V_0 = \frac{FCF_1}{r - g}$

$V_0 = \frac{13805}{0.1062 - 0.0354}$

---> Total Firm Value

Value of common equity = Value of firm - Value of debt - value of preferred stock

Value of common equity = $194,985.88 mil - $87,744 mil - $48,746 mil

Value of common equity = $58,495.88 ---> Intrinsic value of common equity

Value per share = Value of common equity/Number of shares

Value per share = $58,495.88 mil/750 mil = $77.99 ---> Intrinsic value per share