19. O 20 O Click here to read the eBook: Enterprise-Based Approach to Valuation

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19. O 20 O Click here to read the eBook: Enterprise-Based Approach to Valuation Problem Walk-Through CORPORATE VALUE MODEL Assume that today is December 31, 2016, and that the following information applies to Abner Airlines: After-tax operating income (EBITC1-T)] for 2017 is expected to be $500 million The depreciation expense for 2017 is expected to be $140 million The capital expenditures for 2017 are expected to be $425 million. No change is expected in net operating working capital The free cash flow is expected to grow at a constant rate of 4% per year. ·The required return on equity is 14%. The WACC is 11%. The market value of the company's debt is $2 billion. 60 million shares of stock are outstanding. Using the corporate valuation model approach, what should be the today? Round your answer to the nearest cent. Write out your answer example, 0.00013 million should be entered as 130. company's stock price completely. For Check My Work (3 remaining) So 088 2 3 4 5 6

Explanation / Answer

Expected Free cash flows of firm (FCF) = EBIT (1 - t) + Depreciation - capital expenditure = $500 million + $140 million - $425 million = $215 million

Value of firm = Expected FCF / (WACC - g)

where, g = growth rate

Value of firm = $215,000,000 / (0.11 - 0.04) = $3,071,428,571.42

Value of Equity = Value of firm - Value of debt = $3,071,428,571.42 - $2,000,000,000 = $1,071,428,571.42

Stock price = Value of Equity / No. of shares = $1,071,428,571.42 / 60,000,000 = $17.857143 or $17.86

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