Suppose you have been asked to estimate the value of two privately held companies that don’t pay any dividends.

The first company is in a mature industry. The company currently has free cash flow of $24 million and it is expected to grow at a constant rate of 5%. Its WACC is 11%. The company owns marketable securities of $100 million. It is financed with $200 million of debt, $50 million of preferred stock, and $210 million of book equity. It currently has 10 million shares of stock.

The second company is in a growing industry. The company has recently borrowed $40 million to finance its expansion; it has no other debt or preferred stock. It pays no dividends and currently has no marketable securities. It is expected that the company will produce free cash flows of –$5 million in one year, $10 million in two years, and $20 million in three years. After three years, free cash flow will grow at a rate of 6%. Its WACC is 10% and it currently has 10 million shares of stock.

Using the data provided, you are required to answer the following questions:

a) Explain how to use the corporate valuation model to find the price per share of common equity.

b) For the first company, find the following: value of operations, total corporate value, intrinsic value of equity, and intrinsic stock price per share. Show your calculations.

Answer rating: 100% (QA)

a Corporate valuation model can be done by finding the ... View the full answer