3 . The multi-stage valuation model

Consider the case of Flying Cow Aviation Inc.:

Flying Cow Aviation Inc. is expected to generate a free cash flow (FCF) of $1,180,000 this year, and the FCF is expected to grow at a rate of 14% over the following two years (FCF22 and FCF33). After the third year, however, the companys FCFs are expected to grow at a constant rate of 6% per year, which will last forever (FCF4 - 4 - ). If Flying Cows weighted average cost of capital (WACC) is 12%, complete the following table and compute the current value of Flying Cows operations. Round all dollar amounts to the nearest whole dollar, and assume that the firm does not have any nonoperating assets in its balance sheet and that all FCFs occur at the end of each year.

Year	CFtt	PV(FCFtt)
FCF11	$1,180,000
FCF22
FCF33
FCF44
Horizon Value4- 4-
	Vopop =

Flying Cows debt has a market value of $16,875,959, and Flying Cow has no preferred stock in its capital structure. If Flying Cow has 100,000 shares of common stock outstanding, then the total value of the companys common equity is

, and the estimated intrinsic value per share of its common stock is

per share.

Assume the following:

	The end of Year 3 differentiates Flying Cows short-term and long-term FCFs.
	Professionally-conducted studies have shown that more than 80% of the average companys share price is attributable to long-termrather than short-termcash flows.

Is the percentage of Flying Cows expected long-term cash flows consistent with the value cited in the professional studies?

No, because only 50.05% of the firms share price is derived from its expected long-term free cash flows.

No, because the percentage of Flying Cows expected long-term cash flows is actually 14.30%.

Yes, because 85.70% of the firms share price is derived from its expected long-term free cash flows.

Yes, because 75.42% of the firms share price is derived from its expected long-term free cash flows.

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