Question

11. More on the corporate valuation model

Galaxy Corp. is expected to generate a free cash flow (FCF) of $14,415.00 million this year (FCF₁ = $14,415.00 million), and the FCF is expected to grow at a rate of 26.20% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 4.26% per year, which will last forever (FCF₄). Assume the firm has no nonoperating assets. If Galaxy Corp.’s weighted average cost of capital (WACC) is 12.78%, what is the current total firm value of Galaxy Corp.? (Note: Round all intermediate calculations to two decimal places.)

$324,026.88 million

$43,088.26 million

$238,934.47 million

$286,721.36 million

Galaxy Corp.’s debt has a market value of $179,201 million, and Galaxy Corp. has no preferred stock. If Galaxy Corp. has 525 million shares of common stock outstanding, what is Galaxy Corp.’s estimated intrinsic value per share of common stock? (Note: Round all intermediate calculations to two decimal places.)

$341.33

$113.78

$112.78

$125.16

Answer 1

a)
FCF1 = $14,415
FCF2 = $14,415 * (1 + 26.20%) = $18,191.73
FCF3 = $18,191.73 * (1+26.20%) = $22,957.96326
FCF4 = $22,957.96326 * (1 + 4.26%) = $23,935.97249

Value after year 3 = FCF4 / (WACC - g)
= $23,935.97249 / (0.1278 - 0.0426)
= $280,938.6443

Current value of firm = ($14,415 / 1.1278) + ($18,191.73 / 1.1278^2) + ($22,957.96326 / 1.1278^3) + ($280,938.6443 / 1.1278^3)
= $12,781.5216 + $14,302.42968 + $16,004.3148 + $195,846.2281
= $238,934.47 million

Current value of firm = $238,934.47 million

b)
Intrinsic value per share =(current total value - debt) / common stock outstanding
= ($238,934.47 - $179,201) / 525
= $113.78

Intrinsic value per share = $113.78