10. Corporate valuation model AaAa The corporate valuation model, the price-to-e
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Question
10. Corporate valuation model AaAa 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 simlar 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 dont pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Gadget Twin Inc. has an expected net operating profit after taxes, EBIT(1-T),of $12,800 million in the coming year. In addition, the firm is expected to have net capital expenditures of $1,920 million, and net operating working capital (NowWC) is expected to increase by $40 million. How much free cash flow (FCF) is Gadget Twin Inc. expected to generate over the next year? O $289,748 million $10,840 million $14,680 million $10,920 million Gadget Twin Inc.'s FOs are expected to grow at a constant rate of 3.18% per year in the future. The market value of Gadget Twin Inc.'s outstanding debt is $76,698 milion, and preferred stocks' value is $42,610 million. Gadget Twin Inc. has 600 million shares of common stock outstanding, and its welighted averoge cost of capital (WACC equals 9.54%. Using the preceding information and the FCF you calculated in the previous question, calcul ate the appropriate values in this table. Term Value (Millions) 170,440.25 Total firm value Value of common equlty Intrinsic value per share 1,132.25 DOLLExplanation / Answer
Expected NOPAT = $12,800 million
Net Capex = $1,920 million.
Change in working Capital = $40 million
Free Cash flow = NOPAT - Capex - Change in working Capital
= $12,800 - $1,920 - $40
= $10,840.
Expected FCF in next year will be $10,840.
b.
Value of firm = $10,840 / (9.54% - 3.18%)
= $170,440.25 million.
Value of equity = Value of firm - Value of debt - Value of preferred stock
= $170.440.25 - $76,698 - $42,610
= $51,132.25.
Value of equity is $51,132.25.
Intrinsic value of stock = Total Value of equity / Number of share outstanding
= $51,132.25 / 600
= $85.22.
Intrinsic value of equity is $85.22.-
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