Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value...

Corporate valuation model

The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model.

Charles Underwood Agency Inc. has an expected net operating profit after taxes, EBIT(1 – T), of $14,200 million in the coming year. In addition, the firm is expected to have net capital expenditures of $2,130 million, and net operating working capital (NOWC) is expected to increase by $35 million. How much free cash flow (FCF) is Charles Underwood Agency Inc. expected to generate over the next year?

A. $12,035 million

B. $288,976 million

C. $12,105 million

D. $16,295 million

Charles Underwood Agency Inc.’s FCFs are expected to grow at a constant rate of 3.54% per year in the future. The market value of Charles Underwood Agency Inc.’s outstanding debt is $76,494 million, and its preferred stocks’ value is $42,496 million. Charles Underwood Agency Inc. has 525 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 10.62%.

Term	Value (Millions)
Total firm value
Intrinsic value of common equity
Intrinsic value per share

Using the preceding information and the FCF you calculated in the previous question, calculate the appropriate values in this table. Assume the firm has no nonoperating assets.

Expert Solution

Colby Messinger answered 2 years ago

10. Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic...

10. Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Charles Underwood...

One measure of the value of a stock is its price to earnings ratio (or P/E...

One measure of the value of a stock is its price to earnings ratio (or P/E ratio). It is the ratio of the price of a stock per share to the earnings per share and can be thought of as the price an investor is willing to pay for $1 of earnings in a company. A stock analyst wants to know whether the P/E ratios for three industry categories differ significantly. The following data represent simple random samples of companies...

(1) Estimate a multiple regression equation with the price-earnings ratio (P/E) as the dependent variable and...

(1) Estimate a multiple regression equation with the price-earnings ratio (P/E) as the dependent variable and the following as independent variables: intercept, gross profit margin, sales growth, dummy variable for industry 1, and dummy variable for industry 2. (2 ) Create a set of dummy variables for each of the three industries. (3) Interpret the regression results: (a) adjusted R-square (b) F-statistic (c) t-statistics for each of the coefficients (4) Calculate a P/E ratio point estimate for a firm with...

1. The price-earnings ratio P/E is the ratio (market value of one share)/(earnings per share). If...

1. The price-earnings ratio P/E is the ratio (market value of one share)/(earnings per share). If P/E increases by 19% and the earnings per share decrease by 9%, determine the percentage change in the market value. Round your answer to the nearest percentage point. - 2. To produce each product unit, the company spends $1.75 on material and $2.95 on labor. Its total fixed cost is $9000. Each unit sells for $6.15. What is the smallest number of units that...

Today, a Company’s Price to Earnings ratio (P/E Ratio) is 10.0x. P/E = Price per Share...

Today, a Company’s Price to Earnings ratio (P/E Ratio) is 10.0x. P/E = Price per Share / Earnings per Share. Tomorrow, if new information comes out and becomes public that the product sales will triple, what do you think could be the P/E ratio tomorrow?

What are the pitfalls of using a price/earnings valuation approach? When is it most appropriate?

Develop a valuation model for a corporate bond with a par value at maturity of $1,000,...

Develop a valuation model for a corporate bond with a par value at maturity of $1,000, a maturity of 20 years, a coupon interest rate of 7%, and a yield to maturity of 4%. The coupons are assumed to be paid semi-annually. In your development and presentation, include a time line showing the relevant cash flows along with all of the steps that allow you to generate the value (price of the bond). Given the problem above, identify how the...

There are multiple stock valuation methods. The price-earnings (PE) method is one of the most popular....

There are multiple stock valuation methods. The price-earnings (PE) method is one of the most popular. The PE method is provided by the Wall Street Journal in all of its stock quotations. The PE logic is that future earnings are important determinants of a firm’s value. The PE method has several variations which can result in different valuations. Discuss the assumptions underlying the calculation of the PE ratio. What are its shortcomings?

Discuss the following approaches to valuation: i)Adjusted present Value Approach ii)Excess return Model iii)Contigent Valuation Model...

Discuss the following approaches to valuation: i)Adjusted present Value Approach ii)Excess return Model iii)Contigent Valuation Model for undeveloped land iv) Replacement Cost

Develop and present a valuation model for corporate debt with a face value of $100 million...

Develop and present a valuation model for corporate debt with a face value of $100 million dollars. The model should use hypothetical assumptions for the coupon rate and other characteristics as well as a hypothetical market interest rate. You must also select a maturity for the bonds and the frequency of the coupon payments. The market rate should be justifiable/reasonable given current market conditions. Explain why the model will be important for the issuance process that is being considered.

Question