CORPORATE VALUE MODEL Assume that today is December 31, 2016, and that the follo

Question

CORPORATE VALUE MODEL

Assume that today is December 31, 2016, and that the following information applies to Abner Airlines:

After-tax operating income [EBIT(1 - T)] for 2017 is expected to be $600 million.
The depreciation expense for 2017 is expected to be $80 million.
The capital expenditures for 2017 are expected to be $350 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 16%.
The WACC is 12%.
The market value of the company's debt is $4 billion.
260 million shares of stock are outstanding.

Using the corporate valuation model approach, what should be the company's stock price today? Round your answer to the nearest cent. Write out your answer completely. For example, 0.00013 million should be entered as 130.

Explanation / Answer

Here we have to find the free cash flow(FCF)

FCF = EBIT(1-T) + Depreciation - capital expenditures - change in working capital

EBIT(1-T) = 600 million

depreciation = 80 Million

capital expenditure = 350 Million

Change in working capital = 0

Hence substitute the values in the above formula.

we get FCF = 330 Million.

Now we have to find the firm value (FV)

FV = FCF/ (WACC - g)

WACC = 12%

g = constant growth rate = 4%

Hence FV = 4125 Million

This is the total firm value.

Total firm value = Market value of equity +Market value of debt + ........

here only Market value of equity and Market value of debt can be considered.

Total firm value = Market value of equity +Market value of debt

Hence Market value of equity = 125000000 = 125 million

Number of shares outstanding= 260 million

Hence the market price per share = Market value of equity / Number of shares outstanding

hence the market price per share = 0.4807 $

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.