We present $2$ examples of the corporate valuation model. In the first problem, 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 period 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 $$430$ million and its $2020$ depreciation expense

will be $$65$ million. Barrington's $2020$ gross capital expenditures are expected to be $$110$ million and the change in its net operating working capital for $2020$ will be $$20$ million. The firm's free cash flow

expected to grow at a constant rate of $4\mathrm{.}5\%$ annually. Assume that its free cash flow occurs at the end of each year. The firm's weighted average cost of capital is $8\mathrm{.}7\%$; the market value of the company's

debt is $$2\mathrm{.}2$ billion; and the company has $180$ 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 zero non$-$operating assets. 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$-$end free cash flows $($in millions$)$ shown below.

The weighted average cost of capital is $9\%,$ and the FCFs are expected to continue growing at a $3\%$ rate after Year $5.$ The firm has $$25$ million of market$-$value debt, but it has no preferred stock or any

other outstanding claims. There are $20$ million shares outstanding. Also, the firm has zero non$-$operating assets. What is the value of the stock price today $($Year $0)?$ Round your answer to the nearest cent.

Do not round intermediate calculations.

$$,$ 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 length of time the investor plans to hold the stock.

The statement above

Conclusions

Analysts use both the discounted dividend model and the corporate valuation model when valuing mature, dividend$-$paying firms; and they generally use the corporate model when valuing 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 it for all 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.