Question

a. Describe briefly the legal rights and privileges of common stockholders.

b. What is free cash flow (FCF)? What is the weighted average cost of capital? What is
the free cash flow valuation model?

d. Suppose the free cash flow at Time 1 is expected to grow at a constant rate of gL
forever. If gL , WACC, what is a formula for the present value of expected free
cash flows when discounted at the WACC? If the most recent free cash flow is
expected to grow at a constant rate of gL forever (and gL , WACC), what is a
formula for the present value of expected free cash flows when discounted at
the WACC?

e. Use B&M’s data and the free cash flow valuation model to answer the following
questions:
(1) What is its estimated value of operations?
(2) What is its estimated total corporate value? (This is the entity value.)
(3) What is its estimated intrinsic value of equity?
(4) What is its estimated intrinsic stock price per share?

Answer 1

a.

The common stockholders regularly have the right which is termed as the preemptive right, in order to buy any extra shares sold by the company. In certain states, the preemptive right is naturally incorporated for each corporate contract, in others terms, it is important to include it explicitly into the contract. Ownership suggests as control. Subsequently, the common stockholders of a company reserve the privilege to choose the managers of its company, who thus choose the executives who supervise with the business.

b.

• Free Cash Flow (FCF): It is termed as the amount of cash flow that is accessible for circulation to the entirety of an organization's investors. The FCF is created by an organization's operations.
• Weighted Average Cost of Capital (WACC): The (WACC) is termed as the total rate of return or interest rate or discount rate by the entirety of the organization's investors. The present value of their projected future free cash flows that are discounted at the WACC, is the total value of operations.
• Free Cash Flow Valuation Model: The FCF valuation model characterizes the estimation of an organization's operations as the current estimation of its projected cash flows when discounted at the WACC.

d.

The formula for the present value of expected free cash flows when discounted at the WACC:

The formula for the present value of expected free cash flows when discounted at the WACC: