Question

11. More on the corporate valuation model

Globo-Chem Co. is expected to generate a free cash flow (FCF) of $8,030.00 million this year (FCF₁ = $8,030.00 million), and the FCF is expected to grow at a rate of 25.00% over the following two years (FCF₂ and FCF₃). After the third year, however, the FCF is expected to grow at a constant rate of 3.90% per year, which will last forever (FCF₄). Assume the firm has no nonoperating assets. If Globo-Chem Co.’s weighted average cost of capital (WACC) is 11.70%, what is the current total firm value of Globo-Chem Co.? (Note: Round all intermediate calculations to two decimal places.)

$24,236.54 million

$191,367.44 million

$144,158.09 million

$172,989.71 million

Globo-Chem Co.’s debt has a market value of $108,119 million, and Globo-Chem Co. has no preferred stock. If Globo-Chem Co. has 675 million shares of common stock outstanding, what is Globo-Chem Co.’s estimated intrinsic value per share of common stock? (Note: Round all intermediate calculations to two decimal places.)

$58.73

$53.39

$160.17

$52.39

Answer 1

Given about Globo-Chem Co.

FCFF in year 1 FCF1 = $8030 million

FCF are expected to grow at a rate of 25.00% over the following two years

=> FCF2 = FCF1*1.25 = 8030*1.25 = $10037.50 million

FCF3 = FCF2*1.25 = 10037.5*1.25 = $12546.875 million

Thereafter growth rate g = 3.9%

Company's cost of capital Kc = 11.70%

So, terminal value at year 3 can be calculated using constant growth model,

TV = FCF3*(1+g)/(Kc - g) = 12546.875*1.039/(0.117-0.039) = $167130.81 million

So, enterprise value is PV of FCFF and TV discounted at Kc

So, EV0 = FCF1/(1+Kc) + FCF2/(1+Kc)^2 + FCF3/(1+Kc)^3 + TV/(1+Kc)^2

EV0 = 8030/1.117 + 10037.50/1.117^2 + 12546.875/1.117^3 + 167130.81/1.117^3 = $144158.09 million

So, current total firm value of Globo-Chem Co. = $144158.09 million

Value of equity is calculated as:

Value of equity = Enterprise value - Debt + cash = 144158.09 - 108119 + 0 = $36039.09 million

Thus market value of equity = $36039.09 million

So stock price per share = Market value of equity/number of shares = 36039.09/675 = $53.39 per share

So, company stock price today = $53.39 per share.