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 Spandust Industries Inc. has an expected net operating profit after taxes,EBIT 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 $50 million. How much free cash flow (FCF) is Spandust Industries Inc. expected to generate over the next year? O $730 million $870 million $630 million O $25,500 million Spandust Industries Inc.'s FCFs are expected to grow at a constant rate of 2.10% per year in the future. The market value of Spandust Industries Inc.'s outstanding debt is $6,750 million, and preferred stocks, value is 3,750 million. Spandust Industries Inc. has 750 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 6.30%. 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

Free Cash Flow=EBIT*(1-Tax)-Capital Expenditure-Working Capital Investment=800-120-50=$630 million

WACC=6.3%

Enterprise value or Total Firm Value=FCFF/(WACC-growth rate)=630/(6.3%-2.1%)=$15000 million=$15 billion

Debt=$6750 million

Preferred Stock=$3750 million

Equity value=Firm value-Debt-Preferred Stock

hence, value of common equity or Equity value=15000-6750-3750=$4500 million

Intrinsic Value per share=Equity Value/Number of shares outstanding=4500/750=$6

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