Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Corporate Valuation is a fundamental concept in finance. A corporate valuation model is used to determine value of a firm with no history of dividends,

image text in transcribed
image text in transcribed
image text in transcribed
image text in transcribed
image text in transcribed
Corporate Valuation is a fundamental concept in finance. A corporate valuation model is used to determine value of a firm with no history of dividends, or divisions of a larger firm. A firm's value is determined by its ability to generate cash flow both now and in the future. The corporate model first calculates the firm's free cash flows, then finds their present values to determine the firm's value: FCF=[EBIT(IT)+Depreciationandamortization]+[Capitalexpenditures+NetoperatingworkitCanysyyoptrations=PVofexpectedfuturefreecashflows Here, EBIT is eamings before interest and taxes; FCF, is the free cash flow generated in year I before any payments are made to any investors, so it must be used to compensate common stockholders, preferred stockholders, and bondholders; WACC is weighted average cost of all the firm's capital, such as debt, preferred stock, and common equity. Free cash flows are forecasted for 5 to 10 years, after which it is assumed that the company reaches its horizon date. That is, the final explicitly forecasted FCF will grow at some long-run constant rate. You can use the following formula to calculote the market value of the company's operations as of that date: =WACC-TOCFCFNu Market value of company = Market value of compuny's operations + Market nalue of company's nanoperating ass Suppose your company's WACC =13% and you know that the free cash flow of your coms Suppose your company's WACC =13% and you know that the free cash flow of your company next year is going to be FCF1=$24.6 and then FCF is expected to grow at 8%. Then the FCF2 is and the company's horizon value in one year is This means that the firm's value today is Step 2; Learn: Corporate Valuation Watch the following video for an example, then answer the questions that follow. The following table shows projected free cash flows for the next three years for Care4UMed Corp., a company producing portable oxygen machines. After the three year period, Care4UMed is expected to grow at a constant rate of 8% and its WACC is 13%. Care4UMed has $15 million of debt and $210 million sharas of stock outstanding. According to the video, what is the formula for Care4uMed's horizon value? HV3=(WACCp)2FCF4HV3=WACCRFCF4HV3=1+WCCFCF3HV3=(WACC-Et)FCF1 Care4uMed's horizon value is million. According to the video, what is the formula for the firm's value today? V0=(1+HACO)FCF1+(1+WACC2FCC1+(1+WAC)2FCC1+HV3V0=(1+HC0)FCF1+(1+HACC2FCF2+(1+WAC)2FCF1+(1+HACC2WV3 According to the video, what is the formula for the firm's value today? V0=(1+WACC1FCF1+(1+WACC2FC3+(1+WACC2FCF3+HV3V0=(1+WAC)1FCF3+(1+WACC2FCF3+(1+WAC)3FCF3+(1+WACC)4HV3V0=(1+WaCC)1HV3V0=(1+WACC11FCF1+(1+WACC2FCF3+(1+W1C1FC3+(1+WACC)3H3 Care4uMed's value today is million. According to the video, the value of equity is found as Care4UMed's equity is million. According to the video, the price per share is found as CarequMed's the price per share is Step 3: Practice: Corporate Valuation Now it's time for you to practice what you've learned. The following table shows projected free cash flows for the next four years for Quick Sky Corp., a company producing wind turbines. low it's time for you to practice what you've learned. The following table shows projected free cash flows for the next four years for Quick Sky Corp., a company producing wind turbines. After the four year period, Quick Sky is expected to grow at a constant rate of 8% and its WACC is 13%. Quick Sky has $15 million of debt and $210 million shares of stock outstanding. Quick Sky's value today is million and the price per share today is

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Investment Science

Authors: David G. Luenberger

1st International Edition

0195391063, 9780195391060

More Books

Students also viewed these Finance questions