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Module 11 Problems

The document discusses the valuation of operations for various firms using free cash flow and growth rates. It provides calculations for EMC Corporation, Radell Global Operations, and Brooks Enterprises, detailing their respective values of operations and intrinsic market value added (MVA). Key formulas and examples illustrate how to determine these values based on projected cash flows and weighted average cost of capital (WACC).

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ballerinal3iscuit
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4 views8 pages

Module 11 Problems

The document discusses the valuation of operations for various firms using free cash flow and growth rates. It provides calculations for EMC Corporation, Radell Global Operations, and Brooks Enterprises, detailing their respective values of operations and intrinsic market value added (MVA). Key formulas and examples illustrate how to determine these values based on projected cash flows and weighted average cost of capital (WACC).

Uploaded by

ballerinal3iscuit
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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11–2.

Value of Operations of Constant Growth


Firm EMC Corporation has never paid a
dividend. Its current free cash flow of $400,000
is expected to grow at a constant rate of 5%.
The weighted average cost of capital is WACC =
12%. Calculate EMC's value of operations.
11-2 Value of operations = Vop = PV of expected future free cash flow

FCF (1  g) $400,000(1.05)
Vop = = = $6,000,000.
WACC  g 0.12  0.05
11–3.
Horizon Value: Current and projected free cash flows for Radell Global
Operations are shown below. Growth is expected to be constant after 2014,
and the weighted average cost of capital is 11%. What is the horizon
(continuing) value at 2014?

Actual Projected
2012 2013 2014 2015
Free cash flow (millions of dollars) $606.82 $667.50 $707.55 $750.00
11-3 The growth rate in FCF from 2014 to 2015 is g = ($750.00-$707.55)/$707.50 = 0.06.
$707.55 (1.06)
VOp at 2014 = = $15,000.
0.11  0.06
11–4. EROIC and MVA of Constant Growth Firm
A company has capital of $200 million. It has
an EROIC of 9%, forecasted constant growth of
5%, and a WACC of 10%. What is its value of
operations? What is its intrinsic MVA? (Hint:
Use Equation 11-5.)
 $200,000,000 
11-4 Vop $200,000,000    [0.09  0.10]
 0.10  0.05 
=$200,000,000 + (-$40,000,000)= $160,000,000.
MVA = $160,000,000 - $200,000,000 = -40,000,000.
11–6. Value of Operations Brooks Enterprises
has never paid a dividend. Free cash flow is
projected to be $80,000 and $100,000 for the
next 2 years, respectively; after the second
year, FCF is expected to grow at a constant rate
of 8%. The company's weighted average cost of
capital is 12%.

A. What is the terminal, or horizon, value of


operations? (Hint: Find the value of all free
cash flows beyond Year 2 discounted back to
Year 2.)

B. Calculate the value of Brooks's operations.


$40 (1.07)
11-7 a. HV3 = = $713.33.
0.13  0.07

b. 0 1 2 3 4 N
WACC = 13%
| | | | g = 7% |    |
-20 30 40
($ 17.70)
23.49 Vop3 = 713.33
522.10 753.33
$527.89

c. Total valuet=0 = $527.89 + $10.0 = $537.89.


Value of common equity = $537.89 - $100 = $437.89.
$437.89
Price per share = = $43.79.
10.0

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