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11. More on the corporate valuation model Allied Biscuit Co. is expected to generate a free...

11. More on the corporate valuation model

Allied Biscuit Co. is expected to generate a free cash flow (FCF) of $6,070.00 million this year (FCF1FCF1 = $6,070.00 million), and the FCF is expected to grow at a rate of 19.00% over the following two years (FCF2FCF2 and FCF3FCF3). After the third year, however, the FCF is expected to grow at a constant rate of 2.10% per year, which will last forever (FCF4FCF4). If Allied Biscuit Co.’s weighted average cost of capital (WACC) is 6.30%, what is the current total firm value of Allied Biscuit Co.?

$231,867.54 million

$193,222.95 million

$228,217.04 million

$19,258.94 million

Allied Biscuit Co.’s debt has a market value of $144,917 million, and Allied Biscuit Co. has no preferred stock. If Allied Biscuit Co. has 750 million shares of common stock outstanding, what is Allied Biscuit Co.’s estimated intrinsic value per share of common stock?

$64.41

$193.22

$70.85

$63.41

Expert Solution

Q-11)

Expected free cash flow this year (FCF1) = $6070 million

Growth rate of FCF in next 2 years is (g) = 19%

Growth rate of FCF therafter from year 4(g1) = 2.10%

WACC = 6.30%

Calculating the Enterprise value(EV) or total firm value of Allied Biscuit Co:-

EV = $5710.254 + $6392.476 + 7156.206 + $173,963.955

EV = $193,222.89 millions

So, total firm value of Allied Biscuit Co is $193,222.95 millions

Option 2 (Difference in answer in decimals due to rounding off)

Enterprise Value = Market Value of equity + Market Value of Debt

$193,222.95 million = Market Value of equity + $144,917 million

Market Value of equity = $48,305.95 million

Intrinsic value per share = Market Value of equity/No of shares outstanding

= $48,305.95 million/750 million

Intrinsic value per share = $64.41 per share

Option 1

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jeff jeffy answered 1 year ago

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