The corporate valuation model, the price-to-earnings (P/E) multiple approach, an

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. Sixty Second Avenue Inc. has an expected net operating profit after taxes, EBIT(1 - T), of $4, 100 million in the coming year. In addition, the firm is expected to have net capital expenditures of $615 million, and net operating working capital (NOWC) is expected to increase by $15 million. How much free cash flow (FCF) is Sixty Second Avenue Inc. expected to generate over the next year? $83, 319 million $3, 500 million $4, 700 million $3, 470 million Sixty Second Avenue Inc.'s FCFs are expected to grow at a constant rate of 3.54% per year In the future. The market value of Sixty Second Avenue Inc.'s outstanding debt is $22, 055 million, and preferred stocks' value is $12, 253 million. Sixty Second Avenue Inc. has 225 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 10.62%. Using the preceding information and the FCF you calculated In the previous question, calculate the appropriate values in this table.

Explanation / Answer

Part A

Free cash flow = EBIT (1-t) – Net capital expenditure – Net increase in working capital

                                = 4,100 million – 615 million – 15 million

                                =3470 million

Part B

Total firm value = FCF1 / (WACC –g)

                                = 3470 / (0.1062-0.0354) million

                                = 49,011.30 million

Value of common Stock = total firm value – value of debt – value of preferred stock

                                                = 49,011.30 million – 22,055 million -12,253 million

                                                = 14,703.30 million

Intrinsic value per share = Value of common Stock/ No.of stocks outstanding

                                                = 14,703.30 million / 255 million

                                                = 57.66 million

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