Corporate Value Model: Assume that today is December 31, 2011, and that the foll

Question

Corporate Value Model: Assume that today is December 31, 2011, and that the following information applies to Vermeil AIrlines: *After tax operating income [EBIT (1-T)] for 2012 is expected to be $500 million. * The depreciation expense for 2012 is expected to be $100 million. *The capital expenditures for 2012 are expected to be $200 million. * No change is expected in net operating working capital. * The free cash flow is expected to grow at a constant rate of 6% per year. * The required return on equity is 14%. * The WACC is 10%. * The market value of the company's debt is $3 billion. * 200 million shares of stock are outstanding. Using the corporate valuation model approach, what should be the company's stock price today?

Explanation / Answer

Hi, Please find the calculations as follows: Free cashflows = EBIT +Depreciation - Capital expenditure - Net working capital = 500 + 100 - 200 - 0 = 400 million (400000000) Firm Value = Free cashflows/(WACC - Growth rate) = 400000000/(0.1 - 0.06) = 400000000/0.04 = 10000000000 Firm value = Market value of debt + Market value of equity 10000000000 = Market value of equity + 3000000000 Market value of equity = 7000000000 Stok price of the company is = Market value of equity/Number of shares outstanding = 7000000000/200000000 = 35 Company's stock price today is $35. Thanks. Aman

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