The recognition that dividends are dependent an earnings, so a retiable dividend forecast is based on an underlying forecast of the firm's future escorts and capital requirements, has led to an iterative stock valuation approach, known 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 Market value YC YOX Por Market value of company of company WADO 1 WAOC (WACC non-operating at Free cash flows are generally forecasted for S to 10 years, after which was assumed that the final forecasted free cash flow will grow at some long-run content 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 le Horizon value - Vombery's pero no FCFs=1/(WACC-Roce) Discount the free cash 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 marieet value of equity. The market value of equity is a vided by the number of common shares outstanding to estimate the firm's intrinsic pershare Value We present examples of the corporate vation model. In the first problem, we assume that the firm is a mature company to its free cash rows grow at a constant rate. In the second problem, we assume that the firm has a period of nonconstant growth Quantitative Problem 1: Assume today is December 31, 2019. Barrington Industries expect that is 2020 after-tax operating income EBIT - will be $450 million and its 2020 depreciation expense will be $70 milion Barrington's 2020 gross capital expenditures are expected to be 120 million and the change in its net operating working capital for 2020 will be $25 million. The firm's free cash flow is expected to grow at constant rate of 6.5% annually. Assume that its free cash flow occurs at the end of each year. The firm's weighted average cost of capital is 0.3; the market value of the company's debt la 52.9 billion and the company has 100 million 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 projects. Also, the firm has e non operating Using the corporate Valuation model, what should be the company's stock price today (December 31, 2019? Do not round intermediate calculations. Round your answer to the nearest cent. per share Quantitative Problem 2: Hadley inc. forecasts the year and free cash flows (in minor) shown below. 1 2 4 5 -522 07 539 $43.5 553 556. The weighted average cost of capital is 12, and the FC re expected to continue growing attester Year 5. The firm has $26 million of market value debt, but it has no preferred stock or any other outstanding. There are 10 million shares outstanding. Also, the firm przer non-operating wes What is the value of the stock price today (Year Round your answer to the nearest cont. Do not found intermediate calculations 5 FCF per share According to the valuation models developed in this chapter the value that an investorante a share of stock is dependent on the length of time the investor plans to hold the stock The statement above
