The recognition that dividends ore dependent on earnings, so a relloble dividend forecest is based on an underlying forecost of the firm's future sales, costs and copital requirements, has led to an aiternative stock valuation approsch, known as the corporate valuation model. The market value of a firm is equal to the present value of its expected future free cash nows plus the market value of its non-operating assets: Free cash flows are generally forecasted for 5 to 10 years, after which it is assumed that the final forecasted free cash flow will grow at some long? run constant rote. Once the firm reaches its horizon date, when cosh nows begin to grow at a constant rate, the equation to colculate the continuing value of the firm's operations at that date is: Discount the free cash nows bock of the frrm's welghted average cost of copital to arrive at the volue of the firm today. Once the value of the firm's operations are calcuiated and the value of non-operating assets are added, then the market vatue of debt and preferred are subtrocted to orrive at the market value of equity. The markot 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 or the corporate varuation model. In the frst problem, we assume that the firm is a mature company so its free cash now grow at a constank rate. In the socond probiem, we assume that the firm has a period of nonconstant growth. Quantitative Problem 1: Assume today is December 31, 2019. Barnington Industries expects that its 2020 after-tax operating income [KBrr(1 T)] will be 3420 milion and its 2020 depreciation expense will be 570 milion. Barrington's 2020 gross capital expenditures are expected to be 5100 million and the change in its net operatung working capital for 2020 wil be $25 millon. The firm's free cesh now is expected to grow at a constant rate of 6\% annually. Assume that its free cash flow occurs at the end of each yean. The firm's weighted average cost of capitat is s.9\%: the market value of the company's debt is $2.15 bilion; and the company has 170 mulion shares of common stock outstanding. The firm has ng preferred stock on its balance sheet and has no plans to use it for future copital budgeting projects. Alo, the firm hos zero non-operating assets Using the corporate valustion model, what should be the compony's stock price today (December 31, 2019)? Do not round intermediote calculations. Round your answer to the nearest cent. Quantitative Problem 2: Hodey Inc. forecasts the year-end free cast nows (in mialons) shown below. The weighted average cost of capital is 10%, and the FCFs are expected to continue growing at a 5% rate arter Year 5 . The firm has $25 million of market-value debt, but it has no preferred stock or any other outstanding daims. There are 20 million shares outstanding- Aso, the firm has 2ero non-operating assets. What is the value of the stock price today (Yoar 0 )? Round your answer to the nearest cent. Do not round intermed ate calculations. 3 per shate According to the valuotion modeis developed in this chapter, the value that an imestor assigns to a share of stock is dependent on the length of time the investor pians to hoid the stock: The statement above is Conclusions discounted dividend modet and the corporote valtiation modet when valuing mature, dividend-paying firms; and they arate model when valuing divisions and firms that do not poy dividends. In principle, we should find the same intrinaie value using either model, but differences are orten observed. Even if a compory is paying steady aividends, much can be bearhed from the corporate model; so analysts today use it for all bypes of voluations. The-process of projecting future financiat statements con reveal o greot ded about a company's operations and financing needs. Aso, such agn analysis can provide insights into octions thot might be taken to increase the company's valuej and for this reason, it is integral to the planning and forecasting prociess