Question

use B&M's data and the free cash flow valuation model to answer the following questions. B&M which is expected to grow at a rate of 5% and has a cash flow of $25 million. They have reported short term investments of $100 million, debt of $200 million sbf $50 million preferred stock. The average cost of capital (WACC) is 11% 1. What is the estimated value of expressions? 2.what is the estimated total corporate value?(this is the entity value) 3. what is its intrinsic value of equity? 4. What is its estimated intrinsic value of equity?

Answer 1

Answer

Data used for valuation (in millions);

Free cash flow(FCF0)	$25.0
WACC	11%
Growth(g)	5%
Short-term investments	$100.0
Debt	$200.0
Preferred stock	$50.0

1.Estimated value of expressions

VOE = FCF1

FCF1 =FCF0 * (1 + g) = 25 * 1.05 = $26.25

VOE = WACC-gL = 0.11- 0.05 = 0.06

Then,

VOE = 26.25/0.06 = $437.5

Value of expressions = $437.5

2. Estimated total corporate value

Value of Operation	$437.5
Plus Value of Non-operating Assets	$100.0
Total Corporate Value	$537.5

3.Debt holders have the first claim on corporate value. Preferred stockholders have the next claim and the remaining is left to common stockholders.

Total Corporate Value	$537.5
Minus Value of Debt	$200.0
Minus Value of Preferred Stock	$50.0
Intrinsic Value of Equity	$287.5

4. Intrinsic value already calcuated. We can estimate intrinsic stock price per share by assuming(because question not mentioned the numbers the no. )of shares is 10.

Intrinsic Value of Equity	$287.5
Divided by number of shares	10.0
Intrinsic price per share	$28.75

or

ESTIMATING PRICE PER SHARE

Value of operations	$437.5
+ Value of nonoperating assets	100.00
Total estimated value of firm	$537.5
− Debt	200.00
− Preferred stock	50.00
Estimated value of equity	$287.5
÷ Number of shares	10.00
Estimated stock price per share =	$28.75

Thank You...