Question

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.

Tropetech Inc. has an expected net operating profit after taxes, EBIT(1 – T), of $2,400 million in the coming year. In addition, the firm is expected to have net capital expenditures of $360 million, and net operating working capital (NOWC) is expected to increase by $45 million. How much free cash flow (FCF) is Tropetech Inc. expected to generate over the next year?

$2,715 million

$43,481 million

$2,085 million

$1,995 million

Tropetech Inc.’s FCFs are expected to grow at a constant rate of 3.90% per year in the future. The market value of Tropetech Inc.’s outstanding debt is $11,510 million, and its preferred stocks’ value is $6,394 million. Tropetech Inc. has 675 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 11.70%.

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

Answer a.

Expected Free Cash Flow = EBIT * (1 - T) - Net Capital Expenditure - Increase in NOWC
Expected Free Cash Flow = $2,400 million - $360 million - $45 million
Expected Free Cash Flow = $1,995 million

Answer b.

Growth Rate = 3.90%
WACC = 11.70%

Total Firm Value = Expected Free Cash Flow / (WACC - Growth Rate)
Total Firm Value = $1,995 million / (0.1170 - 0.0390)
Total Firm Value = $1,995 million / 0.0780
Total Firm Value = $25,576.92 million

Intrinsic Value of Common Equity = Total Firm Value - Value of Debt - Value of Preferred Stock
Intrinsic Value of Common Equity = $25,576.92 million - $11,510 million - $6,394 million
Intrinsic Value of Common Equity = $7,672.92 million

Intrinsic Value per share = Intrinsic Value of Common Equity / Number of Shares
Intrinsic Value per share = $7,672.92 million / 675 million
Intrinsic Value per share = $11.37