Based on the corporate valuation model, Bernile Inc.\'s value of operations is $

Question

Based on the corporate valuation model, Bernile Inc.'s value of operations is $750 million. Its balance sheet shows $50 million of short-term investments that are unrelated to operations, $100 million of accounts payable, $100 million of notes payable, $200 million of long-term debt, $40 million of common stock (par plus paid-in-capital), and $160 million of retained earnings. What is the best estimate for the firm's value of equity, in millions?

PLEASE SHOW SOLUTION AND EXPLAIN PLS

Zhdanov Inc. forecasts that its free cash flow in the coming year, that is, at t = 1, will be -$10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm's value of operations, in millions?

PLEASE SHOW SOLUTION AND EXPLAIN PLS

Explanation / Answer

a. firm's value of equity = 40 million + 160 million = $200 million

b. firm's value of operations =present value of free cash flows

= -10/1.14 + 20/1.14^2 + (20*1.04/(14%-4%))/1.14^2 =$166.67 million

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