11. More on the corporate valuation model Aa Aa Acme Inc. is expected to generat
ID: 2619745 • Letter: 1
Question
11. More on the corporate valuation model Aa Aa Acme Inc. is expected to generate a free cash flow (FCF) of $390.00 million this year (FCF1 $390.00 million), and the FCF is expected to grow at a rate of 22.60% over the following two years (FCF2 and FCF). After the third year, however, the FCF is expected to grow at a constant rate of 3.18% per year, which will last forever (FCF4). If Acme Inc.'s weighted average cost of capital (WACC) is 9.54%, what is the current total firm value of Acme Inc.? O $8,435.94 million O $10,123.13 million O $10,710.56 million O $1,200.50 million Acme Inc.'s debt has a market value of $6,327 million, and Acme Inc. has no preferred stock. If Acme Inc. has 525 million shares of common stock outstanding, what is Acme Inc.'s estimated intrinsic value per share of common stock? O $4.02 O $4.42 $12.05 O $3.02Explanation / Answer
11.
FCF1=$390 million
FCF2=(390*1.226)=$478.14million
FCF3=(478.14*1.226)=$586.19964million
Value after year 3=(FCF3*Growth rate)/(WACC-Growth rate)
=(586.19964*1.0318)/(0.0954-0.0318)
=$9510.075292million
Hence current total firm value=Future FCF*Present value of discounting factor(9.54%,time period)
=390/1.0954+478.14/1.0954^2+586.19964/1.0954^3+$9510.075292/1.0954^3
=$8435.94million(Approx)
Hence intrinsic value=(current total firm value-Debt)/Shares of common stock oustanding
=(8435.94-6327)/525
=$4.02(Approx).
12.
Annual dividend=$100*10%=$10
Hence value of preferred stock=Annual dividend/Rate of return
=10/0.134
=$74.63 per share(Approx)
New value=$10/0.0804
=$124.38(Approx)
Hence the value of preferred stock will rise.
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