Company valuation Chiara Company's management has made the projections of Free Cash Flows from for years 1-5. Use the illustrative income statement for Chiara in Table 1 (all figures are in Thousands of U.S. Dollars) to derive/calculate the free cash flows beginning in Year O, but begin your use of cash flows starting in years 1-4. Hence, you will need to calculate the Free Cash Flow from Assets, just as mentioned below. The weighted average cost of capital (WACC) rate is used to discount these free cash flows for Chiara Company :

Table 1. Chiara Inc. Income Statement (Figures which have been changed for Chiara Inc. which are different than the sample take home final exam are noted in blue)

The WACC for Chiara Corp. is 12% and the long-run growth rate beginning in year 5 is 4%. The company has $5 million debt and 1,112,000 shares outstanding. The corporate tax rate is at 40% for this firm.

A) (10 points) What is the value per share?

B) (10 points) If the market price is presently $15.10 per share, is the company under or overvalued?

Hint: Remember that the steps involved are to first calculate the free cash flow amounts for years 1 to 5. Second, discount these forecasted FCF streams in years 1-4, including the fourth year Horizon Value H₄ to the present and sum all amounts to arrive at Chiara Company?s total implicit valuation. Then the next step is to calculate the value of stock or equity per Share. Remember to include Year 5, in the ?Constant growth style model? as the Horizon value Calculation divided by Weighted Average Cost of Capital less the New Constant Growth Rate.

The formula for free cash flow from assets may be found below:

Cash Flow from Assets = Operating Cash Flow

? Net Capital Spending

? Change in net working capital

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Cash Flow from Assets

Operating cash flow = Earnings before interest and taxes (EBIT) + Depreciation ? Taxes

Net Capital Spending = Ending net fixed assets ? beginning net fixed assets + Depreciation

Change in Net Working Capital(NWC) = Ending NWC ? Beginning NWC

Or if working with yearly figures as above, use the single figures