Back to Assignment Attempts: 10. More on the corporate valuation model Keep the

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Back to Assignment Attempts: 10. More on the corporate valuation model Keep the Highest: /6 AaAa? Widget Corp. is expected to generate a free cash flow (FCF) of $2,925.00 million this year (FCF $2,925.00 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 Widget Corp.'s weighted average cost of capital (WACC) is 9.54%, what is the current total firm value of Widget Corp.? O $75,923.72 million O $9,003.82 million O $63,269.77 million O $80,329.45 million Widget Corp-'s debt has a market value of $47,452 million, and Widget Corp, has no preferred stock. It widget Corp. has 750 million shares of common stock outstanding, what is Widget Corp.'s estimated intrinsic value per share of O $63.27 O $23.20 O $20.09 O $21.09

Explanation / Answer

Answer )

The concept of valuation is based on contant growth model,

V = FCF4 / (k-g)----------(1)

, where K = cost of capital ,= 9.54% and g = growth rate = 3.18%

FCF4 = FCF3(1+g)

FCF1 = $2925.00 , FCF2 =FCF1 (1+ 22.60%) = $2925.00 *(1+ 22.60%)

FCF3 = FCF2 (1+ 22.60%) = $2925.00 *(1+ 22.60%) ^2 = $4396. 497

FCF4 = $4396. 497(1+ 3.18%) =$ 4536.306

Using eq(1)   V = 4536.306 / ( 0.0954 - 0.0318)

V = $75923.72 million option A ( nearest value of calculation)

Answer B)

Value for firm(V) = Value of equity(E) - value of debt (D)

E = V-D = $75923.72 - $ 47452

=> E = $28471.72 millions

Value of one share = E/ noof shares = $28471.72/ 750 = 37. 9623 $

Option 2 $ 23.20

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