Consider the case of Flying Cow Aviation Inc.: Flying Cow Aviation Inc. is expected to generate...

Consider the case of Flying Cow Aviation Inc.:

Flying Cow Aviation Inc. is expected to generate a free cash flow (FCF) of $225,000 this year, and the FCF is expected to grow at a rate of 14% over the following two years (FCF2 and FCF3). After the third year, however, the company’s FCFs are expected to grow at a constant rate of 6% per year, which will last forever (FCF4 - ∞). If Flying Cow’s weighted average cost of capital (WACC) is 12%, complete the following table and compute the current value of Flying Cow’s operations. Round all dollar amounts to the nearest whole dollar, and assume that the firm does not have any nonoperating assets in its balance sheet and that all FCFs occur at the end of each year.

Year	CFtt	PV(FCFt)
FCF1	$225,000
FCF2
FCF3
FCF4
Horizon Value4- ∞
	Vop =

Flying Cow’s debt has a market value of $3,217,877, and Flying Cow has no preferred stock in its capital structure. If Flying Cow has 300,000 shares of common stock outstanding, then the total value of the company’s common equity is_________, and the estimated intrinsic value per share of its common stock is____________ per share.

Assume the following:

•	The end of Year 3 differentiates Flying Cow’s short-term and long-term FCFs.
•	Professionally-conducted studies have shown that more than 80% of the average company’s share price is attributable to long-term—rather than short-term—cash flows.

Is the percentage of Flying Cow’s expected long-term cash flows consistent with the value cited in the professional studies?

A. Yes, because 85.70% of the firm’s share price is derived from its expected long-term free cash flows.

B. Yes, because 75.42% of the firm’s share price is derived from its expected long-term free cash flows.

C. No, because only 50.05% of the firm’s share price is derived from its expected long-term free cash flows.

D. No, because the percentage of Flying Cow’s expected long-term cash flows is actually 14.30%.

Expert Solution

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jeff jeffy answered 2 years ago

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