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Look at the Corporate Valuation Models (Formulas 9-7 and 9-8) presented in Chapter 9 and consider what these models are communicating about the key value drivers for a business. What do you think is the most powerful value driver in the formulas? Over which value drivers does management have the most control? The least control? Common Stock Valuation: The Corporate Valuation Model - Corporate Valuation Model calculates the estimated Price of a share of Common Stock by starting with the estimated Market Value of the Firm (Ve), then subtracts from that the estimated Market Value of all Debt (V), and then substracts the estimated Market Value of any Preferred Stock (V) and the net result is the estimated Market Value of the Common Stock (Vs). Then, you divide the estimated Market Value of the Common Stock (V) by the number of Shares of Common Stock to get Po. This formulation follows the Balance Sheet Identity: = Total Assets Common Stock = Total Debt + Preferred Stock + Common Stock, so Total Assets - Total Debt - Preferred Stock = Vs (V) (VE) - (V.) - (VP) and Po = No. of Shares > So how do we estimate the Market Value of Total Assets VF (commonly referred to as "Enterprise Value")? Common Stock Valuation: The Corporate Valuation Model . Corporate Valuation Model estimates the Market Value of Total Assets (V) by (first) forecasting future Free Cash Flow ("FCF", see Chapter 3 for formula for FCF) and discounting the future FCFs by the Minimum Required Rate of Return as measured by the Weighted Average Cost of Capital ("WACC") to get the estimated Market Value of Operating Assets. FCF is the after-tax net cash flow produced by a company's total operating assets minus any maintenance of business capital investments (both capital and working capital). FCF is the net cash flow available to and controlled by the Common Stockholders to service the all financial investors in the business. (Second), you add the estimated Market Value of any Non- Operating Assets (i.e., Excess Cash Balances, if any). Then you have the estimated Market Value for Total Assets (V+). = MV Voperating Assets + MVN Non-Operating Assets Note: In this course we will assume the MV Non-Operating Assets = 0 The Corporate Valuation Model is structured almost identically to the Dividend Growth Model forms: there's a Zero Growth Rate Model, a Constant Growth Rate Model, and a Variable Growth Rate Model. Ve = MVthe Company Common Stock Valuation: The Corporate Valuation Model . Zero Growth FCF Model assumes the FCF is not growing but remains constant. VE = FCF WACC Example: Dominion Corp.'s FCF for Year 1 is estimated to be $400 million and is not expected to grow. The company's WACC is 18%. What is its estimated Enterprise Value? VE = 400 = 2,222.222 - $2.222 billion .18 . Constant Growth FCF Model: Example: Varonar Ltd.'s FCF for Year 1 is estimated VE = FCF to be $10 million and is expected to grow at a 10% (WACC - g) rate each year. The company's WACC is 21%. What is its estimated Enterprise Value? V = 10 90.90909 = $90.91 million (21. 10) . Variable Growth FCF Model would be calculated like the VGM Dividend Model. Common Stock Valuation: The Corporate Valuation Model What is the Estimated Price per Share for Dominion Corp.? Assume Dominion Corp. has $800 million of Debt and 50 million shares of common stock. V = $400_ = $2,222.222 = $2.222 billion .18 Vs = [ $2,222 million less $800 million = $1,422 millon] / 50 million shares . $28.44 per share . What is the Estimated Price per Share for Varonar Ltd.? Assume Varonar Ltd. has $35 million of Debt and 1.5 million shares of common stock. V $10 = $90.90909 = $90.91 million (.21 - 10) Vs = [ $90.91 million less $35 million = $55.91 million] / 1.5 million shares . = $37.27 per share Look at the Corporate Valuation Models (Formulas 9-7 and 9-8) presented in Chapter 9 and consider what these models are communicating about the key value drivers for a business. What do you think is the most powerful value driver in the formulas? Over which value drivers does management have the most control? The least control? Common Stock Valuation: The Corporate Valuation Model - Corporate Valuation Model calculates the estimated Price of a share of Common Stock by starting with the estimated Market Value of the Firm (Ve), then subtracts from that the estimated Market Value of all Debt (V), and then substracts the estimated Market Value of any Preferred Stock (V) and the net result is the estimated Market Value of the Common Stock (Vs). Then, you divide the estimated Market Value of the Common Stock (V) by the number of Shares of Common Stock to get Po. This formulation follows the Balance Sheet Identity: = Total Assets Common Stock = Total Debt + Preferred Stock + Common Stock, so Total Assets - Total Debt - Preferred Stock = Vs (V) (VE) - (V.) - (VP) and Po = No. of Shares > So how do we estimate the Market Value of Total Assets VF (commonly referred to as "Enterprise Value")? Common Stock Valuation: The Corporate Valuation Model . Corporate Valuation Model estimates the Market Value of Total Assets (V) by (first) forecasting future Free Cash Flow ("FCF", see Chapter 3 for formula for FCF) and discounting the future FCFs by the Minimum Required Rate of Return as measured by the Weighted Average Cost of Capital ("WACC") to get the estimated Market Value of Operating Assets. FCF is the after-tax net cash flow produced by a company's total operating assets minus any maintenance of business capital investments (both capital and working capital). FCF is the net cash flow available to and controlled by the Common Stockholders to service the all financial investors in the business. (Second), you add the estimated Market Value of any Non- Operating Assets (i.e., Excess Cash Balances, if any). Then you have the estimated Market Value for Total Assets (V+). = MV Voperating Assets + MVN Non-Operating Assets Note: In this course we will assume the MV Non-Operating Assets = 0 The Corporate Valuation Model is structured almost identically to the Dividend Growth Model forms: there's a Zero Growth Rate Model, a Constant Growth Rate Model, and a Variable Growth Rate Model. Ve = MVthe Company Common Stock Valuation: The Corporate Valuation Model . Zero Growth FCF Model assumes the FCF is not growing but remains constant. VE = FCF WACC Example: Dominion Corp.'s FCF for Year 1 is estimated to be $400 million and is not expected to grow. The company's WACC is 18%. What is its estimated Enterprise Value? VE = 400 = 2,222.222 - $2.222 billion .18 . Constant Growth FCF Model: Example: Varonar Ltd.'s FCF for Year 1 is estimated VE = FCF to be $10 million and is expected to grow at a 10% (WACC - g) rate each year. The company's WACC is 21%. What is its estimated Enterprise Value? V = 10 90.90909 = $90.91 million (21. 10) . Variable Growth FCF Model would be calculated like the VGM Dividend Model. Common Stock Valuation: The Corporate Valuation Model What is the Estimated Price per Share for Dominion Corp.? Assume Dominion Corp. has $800 million of Debt and 50 million shares of common stock. V = $400_ = $2,222.222 = $2.222 billion .18 Vs = [ $2,222 million less $800 million = $1,422 millon] / 50 million shares . $28.44 per share . What is the Estimated Price per Share for Varonar Ltd.? Assume Varonar Ltd. has $35 million of Debt and 1.5 million shares of common stock. V $10 = $90.90909 = $90.91 million (.21 - 10) Vs = [ $90.91 million less $35 million = $55.91 million] / 1.5 million shares . = $37.27 per share