and the value of nan-operating assets are added, then the market value of debt and preferred are subtracted to arrive at the market yslue of equity. The maaket value of equity is divided by the number of common shares outsanding to ettimate the firm's intrinsic per-share value. We present 2 axamples of the corporate vatuation mode. Th the first procient, we assume that the firm is a mature company so its free cash flows grow at a conatant race fie. the second problem, we asswme that the firm has a period of nonconstant growth. Quantitative Problem 1i Assume today is December 31, 2019. Barrington Industries expects that its 2020 after-tax eperating income [EBrr(1 - T)] will be s440 millon and its 2020 depreciation expense will be 170 million, farrington's 2020 gross capital expenditures are expected to be 1100 milion and the change in its net operating werking capital for 2020 will be 530 milNon. The firmis free cash fow is expected to grow at a constant rate of 6% annusily, Assume that its free cash flow eccurs at the end of each year. The firm's weighted average cost of capital is 944; the market value of the conyany' debt is 33 bilion: and the compary has 170 millian shares of common stock outstanding. The firm has no preferred stock on its balance sheet and has no plans to use it for future capital budgeting orojects. Also, the firm has zero non-eperating assets. Using the corporate valuation model, what should be the company's stock price today (Deckmber 31,2019) ? Do not round intermediate calculations. Round your answer to the nearest cent. \$5. per share Quantitative Problem 2i Hadley inc. forecasts the year-end free cash fows (in milions) shown below, The weighted average cost of capital is 10%, and the FCFs are expected to continue growing at a 4% rate after Year 5 . The fim has $24 million of nueket-value debt, but it has no preferred stock or any other outstanding claims. There are 21 millon shares outstanding. Also, the firm has zero non-cperating assets. What is the value of the stock price today (Year 0)? Round your answer to the nearest cent. Do not round intermbsiste calculations. 5 per share According to the valuation models developed in this chapter, the value that an investor arsigns to a share of stock is dependent an the length of time the itwestor plans to hold the stock. The sratement above is Conclusions The recognition that dividends are dependent on eamings, so a reliable dividend forecast is based on an underlying forecost of the firm's future sales, costs and capital requirements, has led to an alternative stock valuation approach, knows as the corporate valuation model. The market value of a firm is equal to the present value of its expected future free cash flows plus the market value of its non-operating assets: Free cash flows are generally forecasted for 5 to 10 years, after which it is assumed that the final forecasted free cash flow will grow at some long-run constant rate. Once the firm reaches its horizon date, when cash flows begin to grow at a constant rate, the equation to calculate the continuing value of the firm's operations at that date is: Horizonvalue=VConpanypenatioats=N=FCFS+1/(WACCgFCP) Discount the free cach flows back at the firm's weighted average cost of capital to arrive at the value of the firm today. Once the value of the firm's operations are calculated and the value of non-operating assets are added, then the market value of debt and preferred are subtracted to arrive at the market value of equity. The market value of equity is divided by the number of common shares eutstanding to estimate the firm's intrinsic per-share value. We present 2 examples of the corpocate valuation model. In the fint problem, we ossume that the firm is a mature cormpany so its free cash flows grow at a constant rate. In the second problem, we assume that the firm has a period of nonconstant growth. Quantitative Problem 11 Assume today is Deceinber 31, 2019, Barrington industries evpects that ats 2020 aftentax operating income (EBIT(1). T)] will be 1440 milion and. its 2020 depreciation expense will be 370 million, Bartington's 2020 gross caphal expenditures are expected to be $100 millon and the change in its net eperating working capital for 2020 will be 130 millien. The firm's free cash fow is expected to grow at a contant rate of 6% annwally. Assume that its free cash flow occirs at the end of each Yeac. The firm's weighted average cost of captal is 95 ; the market value of the company's debt is 83 billion; and the company has 1 zo million shares of common stock. outstanding. The firn has no preferred stock on its belance sheet and has no plans to use in for future capital budgeting projects: Also, the firm has rero non-eperating assets Using the corporate valuation medel, what thould be the company's stock price todoy (December 31 , 2etig)? Do not round intermediate calculations. Aound your antwer to the nearest cent. 1 per share Quantitative Problem 2: Hadley inc forecasts the year-end free cash flows (in millions) shown below. The weighted average cost of capital is 10%, and the FCFs are expected to continue growing at a 4% rate after Year 5 . The firm has $24 million of market-value debt, but it has no preferred stock or any other outstanding claims, There are 21 millon shares outstanding. Also, the firm has zero non-operating assets. What is the value of the stock price today (Year 0) ? Round your answer to the nearest cent. Do not round intermediate calculations. 5 per share According to the valuation models developed in this chapter, the value that an investor assigns to a share of stock is dependent on the iength of time the investor plans to hold the stock. The statement above is Conclusions Analysts use both the discounted dividend model and the corporate valuation model when valuing mature, dividend-paying firms; and they genetaliy use the corporate model when valuing divisions and firms that do not psy dividends. In principle, we should find the same intrinsic value using either model, but differences are ofter observed. Even if a company is paying steady dividends, much can be iearned from the corporate model; so analysts today use it for all types of valuations. The process of projecting future financial statements can reveal a great deal about a company's operations and financing needs. Also, such an analysis can provide insights into actions that might be taken to increase the company's value; and for this reason, it is integral to the planning and forecasting process