The corporate valuation model the pricetoearnings PE multipl

The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value-adde (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you\'ve done in previous problems, but it focuses on a firm\'s free cash flows (F instead of its dividends. Some firms don\'t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Gadget Twin Inc. has an expected net operating profit after taxes, EBIT(1 T), of $12,300 million in the coming year. In addition, the firm is expected to have net capital expenditures of $1,845 million, and net operating work capital (NOWC) is expected to increase by $15 million. How much free cash flow (FCF) is Gadget Twin Inc. expec to generate over the next year? O $10,470 million O $178,193 million O $14,130 million O $10,440 million Gadget Twin Inc.\'s FCFs are expected to grow at a constant rate of 4.98% per year in the future. The market value Gadget Twin Inc.\'s outstanding debt is $47,169 million, and preferred stocks\' value is $26,205 million. Gadget Twin Inc. has 225 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 14.94%. Using the preceding information and the FCF you calculated in the previous question, calculate the appropriate values in this table. Term Value (Millions) Total firm value Value of common equity Intrinsic value per share

Solution

Gadget Twin Inc. Free Cash Flow=Net Profit after tax-Net Investment in Operating Capital Net Investment in Operating Capital=Net Capital Expenditure+Net Working Capital=($1845+$15)Million $       1,860.00 Millions Net Profit after tax $     12,300.00 Millions Free Cash Flow=($12300-$1860) $     10,440.00 Millions Total value of firm=(FCF/(WACC-g) WACC 14.94% 0.1494 g=growth 4.98% 0.0498 (WACC-g)=(.1494-.0498) 0.0996 Total Value of Firm=($10440/.0996) $ 1,04,819.28 Value of Firm-Debt-Preferred stock-Equity=($104819.30-$47169-$26205) $     31,445.28 Millions Number of shares 225 Millions Intrinsic Value Per share=(Value of Equity/Number of shares)=($31445.28/225) $           139.76 Millions