Question

1.Smith and T Co. is expected to generate a free cash flow (FCF) of $5,500.00 million this year (FCF₁ = $5,500.00 million), and the FCF is expected to grow at a rate of 20.20% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 2.46% 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 7.38%, what is the current total firm value of Smith and T Co.? (Note: Round all intermediate calculations to two decimal places.)

A.$182,759.30 million

B.$181,116.17 million

C.$17,273.53 million

D.$150,930.14 million

2.Smith and T Co.’s debt has a market value of $113,198 million, and Smith and T Co. has no preferred stock. If Smith and T Co. has 375 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.)

A.$99.62

B.$100.62

C.$110.68

D.$301.86

Answer 1

1)

FCF1 = 5,500

FCF2 = 5,500 (1 + 20.20%) = 6,611

FCF3 = 6,611 (1 + 20.20%) = 7,946.422

FCF4 = 7,946.422 (1 + 2.46%) = 8,141.903981

Value at year 3 = FCF4 / required rate - growth rate

Value at year 3 = 8,141.903981 / 0.0738 - 0.0246

Value at year 3 = 8,141.903981 / 0.0492

Value at year 3 = 165,485.8533

Total firm value = Present value of cash flows

Total firm value = 5,500 / (1 + 0.0738)^1 + 6,611 / (1 + 0.0738)^2 + 7,946.422 / (1 + 0.0738)^3 + 165,485.8533 / (1 + 0.0738)^3

Total firm value = 5,121.996647 + 5,733.507143 + 6,418.025318 + 133,656.6817

Total firm value = $150,930.14 million

2)

Intinsic value per share = (Total value - debt) / shares outstanding

Intinsic value per share = (150,930.14 - 113,198) / 375

Intinsic value per share = $100.62