Question

10. 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. Blur Corp. has an expected net operating profit after taxes, EBIT(1 - T), of $7,600 million in the coming year. In addition, the firm is expected to have net capital expenditures of $1,140 million, and net operating working capital (NOWC) is expected to increase by $10 million. How much free cash flow (FCF) is Blur Corp. expected to generate over the next year? o $118,668 million . $6,450 million $8,730 million $6,470 million Blur Corp.'s FCFs are expected to grow at a constant rate of 4.62% per year in the future. The market value of Blur Corp.'s outstanding debt is $31,412 million, and its preferred stocks' value is $17,451 million. Blur Corp. has 150 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 13.86%. Value (Millions) $69,805.19 Term 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

Free Cash Flow (FCF)

Free Cash Flow (FCF) = Net Operating Profit After Tax(NOPAT) – Capital Expenditures – Changes in Net Working Capital

=EBIT(1 – Tax Rate) - Capital Expenditures – Changes in Net Working Capital

= $7,600 Million - $1,140 Million - $10 Million

= $6,450 Million

Total Firm Value

Expected Growth Rate (g) = 4.62% per year

Weighted Average Cost of Capital (WACC) = 13.86%

Total Firm Value = FCF / (WACC – g)

= $6,450 Million / (0.1386 – 0.0462)

= $6,450 Million / 0.0924

= $69,805.19 Million

Value of Common Equity

Value of Common Equity = Total Firm Value – Market Value of Debt – Market Value of Preferred Stock

= $69,805.19 Million - $31,412 Million - $17,451 Million

= $20,942.19 Million

Intrinsic Value per share

Intrinsic Value per share = Intrinsic Value of Common Equity / Number of shares of common stock outstanding

= $20,942.19 Million / 150 Million shares outstanding

= $139.61 per share