Free Cash Flow Valuation Model The recognition that dividends are dependent on earmings, so a reliable dividend forecast is based on an underlying forecast of the firm's future sales, costs and capital requirements, has led to an altemative stock valuation approach, known as the free.cash flow valuation model. The market value of a firm is equal to the present value of its expected future free cash fows Market value of company (LW (14W constant rate, the equation to Free cash flows are generally forccasted for S to 10 years, after which it is assumed that the final forccasted free cash flow will grow at some long-run conatant rate. Once the firm reaches its horizon datc, when cash flows begin to grow at calculate the continuing value of the firm at that date is: Horizon value = VCampsay st-F FCFN4 1/'(WACC-gFCF) Discount the free cash lows back at the firm's weighted average cost of capital to arive at the value of the fim today. Once the value of the firm is calculated, 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 outstanding to estimate the firm's intrinsic per-share value we present 2 examples of the free cash no valuation model In the fyst problem, e assur e that the firm is a mature company so its free cash now s gro at a constant rate. In the second problem re assume that the n m has a period of ??constant growth uantitative P oblem 1 Assume today is December 31, 2013. B in ton Industries expects that its 2014 fter-tax operating inco me EBIT 1 T will be?430 million and its 2014 depreciation expense ill be $70 million Barrington's 2014 gross capital expenditures are expected to be $120 million and the change in its net operating working capital for 2014 will be $30 million. The firm's free cash flo is expected to gro at a constant ate of 6% nnually. Assume that its fee cash flo occurs at the end of each year. The firm's eighted average cost of capital is 8%; the market value of the company's debt is $2.95 billion; and the oompany has 170 mason shares of co on stock outstanding. The n has no prefered sto on its balance sheet and has no plans to use it fo future capital budge ects Using the free cash flow valuation model, what should be the company's stock price today (December 31, 2013)? Round your answer to the nearest cent. Do not round intermediate calculations per share Quantitative Problem 2i Hadley Inc. forecasts the yeor-end free cash flows (in millions) shown below Year FCF $22.52 $38.8 $43.9 S53 S55.7 The weighted average cost of capital 5 g% and the FCF are expected to continue o ng at a 3% rate after Year . The firm has S26 million of market value debt, but it has no preferred stock or any other outs anding claims. There are 19 million shares outstanding. What is the velue of the stock price today (Year 01 Round your answer to the nearest cent. Do not round intermediate celculations. per share Acco ding to the valuation models develcped in this chapter, the value that an investor assigns to a share of stock is dependent on the length of time the investor plans to hold the stock The statement above is -Select- Conclusions Analysts use both the discounted dividend model and the free cash low valuation model when valuing mature, dividend-paying firms; and they generally use the corporate model when veluing divisions and firms that do not pay dividends. In principle, we should find the same intrinsic value using either model, but differences are often observed Even if a company is paying steady dividends, much can be learned from the corporate model: so analysts today use i for al 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 Check My Work (remaining)