Look at the Corporate Valuation Models (formulas 9-7 and 9-8) presented in Chapter 9 of financial management,

what these models are communicating about the key value drivers for a business?

What do you think is the most powerful value driver in the formulas?

Which value drivers does management of a business have the most control? The least control?

flow for its investors if and only if the money from its exisung Stores exceeds money required to build and equip its new stores. 9-7A THE CORPORATE VALUATION MODEL In Chapter 3, we explained that a firm's value is determined by its abilitu generate cash flow both now and in the future. Therefore, its market value can be expressed as follows: Market value of company = Vcompany = PV of expected future free cash flows FCF2 FCF. + (1+WACC)" (1 + WACC) (1 + WACC) FCF1 Here FCF, is the free cash flow in Year t; and the discount rate, the WACC, is the weighted average cost of all the firm's capital. When thinking about the WACC) note these two points: 1. The firm finances with debt, preferred stock, and common equity. The WA is the weighted average of these three types of capital, and we discuss iti detail in Chapter 10. Free cash flow is the cash generated before any payments are made to any investors; so it must be used to compensate common stockholders, preferred stockholders, and bondholders. Moreover, each type of investor has a rey rate of return; and the weighted average of those returns is the WAC is used to discount the free cash flows. Free cash flows are generally forecasted for 5 to 10 2. as a required the WACC, which csumed Why might someone use the corporate valuation model for companies that have a history of paying dividends? What steps are taken to find a stock price using the corporate model? Why might the calculated intrinsic value differ from the stock's current market price? Which would be "correct," and what does "correct" mean? 9-8 Preferred Stock13 Preferred stock is a hybrid-it is similar to a bond in some respects and to common stock in others. This hybrid nature becomes apparent when we try to classify preferred stock in relation to bonds and common stock. Like bonds, preferred stock has a par value and a fixed dividend that must be paid before dividends can be paid on the common stock. However, the directors can omit (or "pass") the preferred dividend without throwing the company into bankruptcy. So although preferred stock calls for a fixed payment like bonds, skipping the payment will not lead to bankruptcy. As noted earlier, a preferred stock entitles its owners to regular, fixed dividend payments. If the payments last forever, the issue is a perpetuity whose value, Vp, IS found as follows: VoDo Pfarnar stel je diensend in de Chantar anaka n . T adiate Emanca