Question

11. More on the corporate valuation model

Smith and T Co. is expected to generate a free cash flow (FCF) of $6,020.00 million this year (FCF₁ = $6,020.00 million), and the FCF is expected to grow at a rate of 23.80% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 3.54% per year, which will last forever (FCF₄). Assume the firm has no nonoperating assets. If Smith and T Co.’s weighted average cost of capital (WACC) is 10.62%, what is the current total firm value of Smith and T Co.? (Note: Round all intermediate calculations to two decimal places.)

$18,348.63 million

$141,635.44 million

$153,279.99 million

$118,029.53 million

Smith and T Co.’s debt has a market value of $88,522 million, and Smith and T Co. has no preferred stock. If Smith and T Co. has 225 million shares of common stock outstanding, what is Smith and T Co.’s estimated intrinsic value per share of common stock? (Note: Round all intermediate calculations to two decimal places.)

$393.43

$144.26

$131.14

$130.14

Answer 1

11).

FCF1 = $6,020.00 million

FCF2 = FCF1 x (1+23.80%)
= $6,020.00 million x 1.238
= $7,452.76 million

FCF3 = FCF2 x (1+23.80%)
= $7,452.76 million x 1.238
= $9,226.52 million

FCF4 = FCF3 x (1+3.54%)
= $9,226.52 million x 1.0354
= $9,553.14 million

Firm value = 6020/(1+0.1062)+7452.76/(1+0.1062)^2+9226.52/(1+0.1062)^3+(9553.14/(1+0.1062)^3)*(1/(0.1062-0.0354))
= 5442.05+6090.46+6816.12+99680.89
= $118,029.53 million

Firm value = Equity value + Debt value

Equity value = Firm value - Debt
= $118,029.53 million - $88,522 million
= $29,507.53 million

Intrinsic value per share = Equity value / Total shares outstanding
= $29,507.53 million / 225 million
= $131.14