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 prefer to use the corporate valuation model, which maintains that the value of a corporation is a function of its free cash flows, weighted average cost of capital (WACC), and expected rate of growth.

Consider the following case:

Blue Moose Home Builders has an expected net operating profit after taxes, EBIT x (1 – Tax rate), of $14,700,000 in the coming year. In addition, the firm is expected to have net capital expenditures of $2,205,000, and the firm's net operating working capital (NOWC) is expected to increase by $50,000. Blue Moose expects to generate in free cash flow (FCF) over the next year (rounded to the nearest whole dollar).

Blue Moose’s FCFs are expected to grow at a constant rate of 4.2% per year in the future. The market values of Blue Moose’s outstanding debt and preferred stock are $66,669,643 and $37,038,691, respectively. Blue Moose Home Builders has 750,000 shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 12.6%.

Using the preceding information and the FCF you calculated in the previous question, calculate the appropriate values in this table (again, rounded to the nearest whole dollar).

Value (Millions) | |
---|---|

Total firm value | |

Value of common equity | |

Intrinsic value per share |

Answer #1

Expected FCF = NOPAT - Net Capex - Increase in Working capital

= $14,700,000 - $2,205,000 - $50,000

= $12,445,000

Expected FCF is $12,445,000.

Value of firm = Expected FCF / (WACC - Growth rate)

= $12,445,000 / (12.60% - 4.20%)

= $12,445,000 / 8.40%

= $148,154,761.90.

Value of firm is $148,154,761.90.

Value of equity = Value of firm - Value of debt - value of preferred stock

= $148,154,761.90 - $66,669,643 - $37,038,691

= $44,446,427.90.

Value of equity is $44,446,427.90.

Intrinsic value = Value of equity / Number of share outstanding

= $44,446,427.90 / 750,000

= $59.29.

Intrinsic value of equity is $59.29.

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