Corporate valuation model
The corporate valuation model, the price-to-earnings (P/E)multiple approach, and the economic value added (EVA) approach aresome examples of valuation techniques. The corporate valuationmodel is similar to the dividend-based valuation that you’ve donein previous problems, but it focuses on a firm’s free cash flows(FCFs) instead of its dividends. Some firms don’t pay dividends, ortheir dividends are difficult to forecast. For that reason, someanalysts use the corporate valuation model.
Charles Underwood Agency Inc. has an expected net operatingprofit after taxes, EBIT(1 – T), of $14,200 million in the comingyear. In addition, the firm is expected to have net capitalexpenditures of $2,130 million, and net operating working capital(NOWC) is expected to increase by $35 million. How much free cashflow (FCF) is Charles Underwood Agency Inc. expected to generateover the next year?
A. $12,035 million
B. $288,976 million
C. $12,105 million
D. $16,295 million
Charles Underwood Agency Inc.’s FCFs are expected to grow at aconstant rate of 3.54% per year in the future. The market value ofCharles Underwood Agency Inc.’s outstanding debt is $76,494million, and its preferred stocks’ value is $42,496 million.Charles Underwood Agency Inc. has 525 million shares of commonstock outstanding, and its weighted average cost of capital (WACC)equals 10.62%.
Term | Value (Millions) |
|---|
| Total firm value | Â Â |
| Intrinsic value of common equity | Â Â |
| Intrinsic value per share | Â Â |
Using the preceding information and the FCF you calculated inthe previous question, calculate the appropriate values in thistable. Assume the firm has no nonoperating assets.
