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 Petroxy Oil Co. has an expected net operating profit after taxes, EBIT 1 T), of $800 million in the coming year. In addition, the firm is expected to have net capital expenditures of $120 million, and net operating working capital (NOWC) is expected to increase by $20 million. How much free cash flow (FCF) is Petroxy Oil Co. expected to generate over the next year? O $13,169 million O $900 million O $660 million O $700 million Petroxy Oil Co.'s FCFs are expected to grow at a constant rate of 4.26% per year in the future. The market value of Petroxy Oil Co.'s outstanding debt is $3,486 million, and preferred stocks' value is $1,937 million. Petroxy Oil Co. has 300 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 12.78%. Using the preceding information and the FCF you calculated in the previous question,calculate the appropriate values in this table. Term Value (Millions) Total firm value Value of common equity Intrinsic value per share

Explanation / Answer

EBIT (1 – T) = 800

FCF = EBIT (1 – T) + Depreciation – CapEx - Net WC

FCF = 800 – 120 – 20 = 800 – 140 = 660

FCF = $660 million

WACC = 12.78%, g = 4.26%

Total firm value = 660/(0.1278 – 0.0426) = $7,746.48 million

Debt = $3,486 million, Preferred Share = $1,937 million

Common equity = 7,746.48 – (3,486 + 1,937) = $2,323.48 million

Common equity per share = 2,323.48/300 = $7.74

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