Question

8. Corporate valuation model

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.

Stay Swift Corp. has an expected net operating profit after taxes, EBIT(1 – T), of $14,700 million in the coming year. In addition, the firm is expected to have net capital expenditures of $2,205 million, and net operating working capital (NOWC) is expected to increase by $45 million. How much free cash flow (FCF) is Stay Swift Corp. expected to generate over the next year?

$12,450 million

$16,860 million

$12,540 million

$248,416 million

Stay Swift Corp.’s FCFs are expected to grow at a constant rate of 4.26% per year in the future. The market value of Stay Swift Corp.’s outstanding debt is $65,757 million, and its preferred stocks’ value is $36,532 million. Stay Swift Corp. has 675 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 12.78%.

Term	Value (Millions)
Total firm value
Intrinsic value of common equity
Intrinsic value per share

Using the preceding information and the FCF you calculated in the previous question, calculate the appropriate values in this table. Assume the firm has no nonoperating assets.

Answer 1

Total firm value FCF1/(r-g) Here, $ 12,450 =14700-2205-45 Free cash flows (FCF1) Required return (1) Growth rate (g) 12.78% 4.26% 12450/(12.78%-4.26%) Total firm value | $ 146,126.76 Less: Debt $ 65,757 Preferred stock 36,532 Intrinsic value of common equity | $ 43,837.76 - Number of shares issued 675 Intrinsic value per share 64.94

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