The recognition that dividends are dependent on eamings, so a relisble 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 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: Free cash flows are generatiy forecasted for 5 to 10 years, after which it is assumed that the final forecasted free cash fow will grow at some long-run constant rate. Once the firm reaches its horizon date, when cash flows begin to grow at a canstant rate, the equation to calculate the continuing yalue of the firm's operations at that date is: 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 operabions 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 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 corporate valuation model, In the first prabiem, we assume that the firm is a mature company so its free cash flows grow at a constant rate. In the second problem, we assume that the firm has a peried of nonconstant growth. Quantitative Problem 1: Assume today is December 31, 2019. Barrington industries expects that its 2020 after-tax operating income [EBIT(1 - T)] will be s450 million and its 2020 depreciation expense will be $70 miltion. Barrington's 2020 gross capital expenditures are expected to be $120 million and the change in ts net operating working capital for 2020 will be $25 million. The firm's free cash flow is expected to grow at a constant rate of 5.5% annually. Assume that its free cash flow occurs at the end of each year. The firm's weighted average cost of capital is 8.2.6; the market value of the company's debt is $2.8 billion; and the company has 190 million shares of cammon stock outstanding. The firm has no preferred stock on its balance sheet and has no plans to use it for future coptal budgeting projects. Also, the firm has zero non-cperating assets. Using the coporate valustion model, what should be the company's stock price today (December 31, 2019)7, Do not round intermediate calculations. Round your answer to the nearest cent. per share Quantitative Problem 2: Hadley inc, forecasts the year-end free cash fows (in millions) shown below: The weighted averoge cost of capital is 105 , and the FCFs dre expected to continue growing ot a 34 fate affer Year 5 . The firm has $24 millian of market-value debt, but it nas no preferred stock or any other outstanding daims. There are 19 mikion shares outstanding. Aso, the firm has zero noo-operating assets. What is the value of the itock price toesy (rear, 0)7 Roound your answer to the nearest cent: Do not round intermediate calculations: 3 per share. According to the valuation models developed in this chapter, the value that an investor assigns to a share of stock is dependent on the iength ef time the invector pars to hald the stock. The recognition that dividends are dependent on eamings, so a relisble 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 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: Free cash flows are generatiy forecasted for 5 to 10 years, after which it is assumed that the final forecasted free cash fow will grow at some long-run constant rate. Once the firm reaches its horizon date, when cash flows begin to grow at a canstant rate, the equation to calculate the continuing yalue of the firm's operations at that date is: 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 operabions 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 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 corporate valuation model, In the first prabiem, we assume that the firm is a mature company so its free cash flows grow at a constant rate. In the second problem, we assume that the firm has a peried of nonconstant growth. Quantitative Problem 1: Assume today is December 31, 2019. Barrington industries expects that its 2020 after-tax operating income [EBIT(1 - T)] will be s450 million and its 2020 depreciation expense will be $70 miltion. Barrington's 2020 gross capital expenditures are expected to be $120 million and the change in ts net operating working capital for 2020 will be $25 million. The firm's free cash flow is expected to grow at a constant rate of 5.5% annually. Assume that its free cash flow occurs at the end of each year. The firm's weighted average cost of capital is 8.2.6; the market value of the company's debt is $2.8 billion; and the company has 190 million shares of cammon stock outstanding. The firm has no preferred stock on its balance sheet and has no plans to use it for future coptal budgeting projects. Also, the firm has zero non-cperating assets. Using the coporate valustion model, what should be the company's stock price today (December 31, 2019)7, Do not round intermediate calculations. Round your answer to the nearest cent. per share Quantitative Problem 2: Hadley inc, forecasts the year-end free cash fows (in millions) shown below: The weighted averoge cost of capital is 105 , and the FCFs dre expected to continue growing ot a 34 fate affer Year 5 . The firm has $24 millian of market-value debt, but it nas no preferred stock or any other outstanding daims. There are 19 mikion shares outstanding. Aso, the firm has zero noo-operating assets. What is the value of the itock price toesy (Year, 0)7 Roound your answer to the nearest cent: Do not round intermediate calculations: 3 per share. According to the valuation models developed in this chapter, the value that an investor assigns to a share of stock is dependent on the iength ef time the invector pars to hald the stock. We present 2 examples of the corporate valuation. model. In the first proolem, we assume that the firm is a mature company so its free cash flows grow at a constant rate. In the second probiem, we assume that the firm has a period of nonconstant growth. Quantitative Problem 1: Assume todey is December 31, 2019. Barrington industries expects that its 2020 after-tax operating income [E]rr(1- T)] will be \$450 milion and its 2020 depreciation expense will be $70 million. Barrington's 2020 gross capital expenditures are expected to be 5120 million and the change in its net aperating working capital for 2020 will be $25 million. The firm's free cash flow is expected to grow at a constant rate of 5.5% annualiy. Assume that its free cash flow occurs weighted average cost of coprtal is 8.28; the market value of the company's debt is $2.8 bilion: and the company has 190 million shares of comman stock outstanding. The firm has no preferred stock on its batance sheet and has no plans to use it for future capital budgeting projects. Also, the firm has zero non-operating assets. Using the corporatn Quantitative Problem 2i Hactey inci forecasts the year-end free cash fows (in mulfons) shown below. The wesghted average cost of capral is 10\%, and the FCFs are expected te continue growing at a 3% rate after Year 5 . The firm has 524 iniliion of market-value dett, but is has no preferred stock of any other outitanding claims. There are 19 minion shares outstanding. Also, the fiem has zere non-operating ossets What is the value of the stock phice todoy. (Year o)? Rhound your answer to the nearest cent. Do not round intermedste calculations. 3 per shore According to the valuation models developed in this chapter, the value that an investor asvigns to a thare of utock is dependent en the length of time the investor pians to hold the stock. The statement above is Conclusiens Analyus use both the ciscounted dividend model and the corporate valuation model when valuing mature, dividend ipaying firms and they seneraliy use the corporate madei whin valuing divisions and firms that do net pwy dividends. If princple, we should find the same intrimic value uving either model, but differences are often observed. Even if a company is paying steady dividends, much can be learned from the corporate model; so anaysts today use it for all types of valuations. The process of projecting future financial statements can reveal a great deal sbout a company's operations ans financing needs. Alsa, such an anaysis can provide insights into actions that might be taken to increase the company's value; and for this reason, it is integral to the plonining and forecastino process: We present 2 examples of the corporate valuation. model. In the first proolem, we assume that the firm is a mature company so its free cash flows grow at a constant rate. In the second probiem, we assume that the firm has a period of nonconstant growth. Quantitative Problem 1: Assume todey is December 31, 2019. Barrington industries expects that its 2020 after-tax operating income [E]rr(1- T)] will be \$450 milion and its 2020 depreciation expense will be $70 million. Barrington's 2020 gross capital expenditures are expected to be 5120 million and the change in its net aperating working capital for 2020 will be $25 million. The firm's free cash flow is expected to grow at a constant rate of 5.5% annualiy. Assume that its free cash flow occurs weighted average cost of coprtal is 8.28; the market value of the company's debt is $2.8 bilion: and the company has 190 million shares of comman stock outstanding. The firm has no preferred stock on its batance sheet and has no plans to use it for future capital budgeting projects. Also, the firm has zero non-operating assets. Using the corporatn Quantitative Problem 2i Hactey inci forecasts the year-end free cash fows (in mulfons) shown below. The wesghted average cost of capral is 10\%, and the FCFs are expected te continue growing at a 3% rate after Year 5 . The firm has 524 iniliion of market-value dett, but is has no preferred stock of any other outitanding claims. There are 19 minion shares outstanding. Also, the fiem has zere non-operating ossets What is the value of the stock phice todoy. (Year o)? Rhound your answer to the nearest cent. Do not round intermedste calculations. 3 per shore According to the valuation models developed in this chapter, the value that an investor asvigns to a thare of utock is dependent en the length of time the investor pians to hold the stock. The statement above is Conclusiens Analyus use both the ciscounted dividend model and the corporate valuation model when valuing mature, dividend ipaying firms and they seneraliy use the corporate madei whin valuing divisions and firms that do net pwy dividends. If princple, we should find the same intrimic value uving either model, but differences are often observed. Even if a company is paying steady dividends, much can be learned from the corporate model; so anaysts today use it for all types of valuations. The process of projecting future financial statements can reveal a great deal sbout a company's operations ans financing needs. Alsa, such an anaysis can provide insights into actions that might be taken to increase the company's value; and for this reason, it is integral to the plonining and forecastino process
