Corporate Valuation:

1- The present value of expected future free cash flows

discounted at the weighted average Cost of capital (WACC).
Does not depend on dividends- 2
It can be applied to divisions and subunits as well as to the - 3
entire firm. . i.e. We can use it for the company that has many
. different divisions
Shows how corporate decisions affect Stockholders. - 4
''''Maximizing shareholder wealth
5- Depends on the cash flows from many different assets. i.e.
We can use it for the company that has many assets.
6- Depends on the actions of many managers." managers need
a way to measure the effects of their decisions on corporate
value"

Corporate assets:

1-Operating:
A: assets-in-place
B: growth options
2- Non-operating:
A: Marketable securities.
B: Non-controlling interests

The Corporate Valuation Model:

The value of operations:
Is the present value of the free cash flows the
firm is expected to generate out into the future.
Discounted at its weighted average cost of capital
(WACC), plus the value of its non-operating assets

Vop
=

t=
1

FCFt
(1 + WACC)t

NOWC = Operating - Operating

CA
CL

NOWC10= 272 60 = 212

NOWC11= 320 70 = 250
Operating Capital= NOWC + Net fixed assets
Operating Capital 2010 = 212+279 = 491
Operating Capital 2011 = 250 +310 = 560
Investment in operating capital 2011 = changes in
Operating Capital 2010 - 2011
Investment in operating capital 10-11= 560 491= 69
NOPAT = EBIT (1 - Tax rate)
NOPAT10 = 73 (1- 40%) = 43.8
NOPAT11= 85 (1- 40%) = 51
FCF = NOPAT - Net investment in operating capital FCF = 51 69 =
-18

 Assumptions:
1- Non-constant growth for N years, after that it
will grow at some constant rate
2- Calculate the expected free cash flow for
each of the (N) non-constant growth Years
3- Growth after Year N will be constant
4 - Find the PV of the free cash flows for each of
the N non-constant growth years and find the
PV of the firms value at Year N.
5 Finally, sum all the PVs for the non-constant
and constant growth periods.

Constant Growth Formula:

Vop =
=

FCF1
(WACC - g)
FCF0(1+g)
(WACC - g)

:Data
*FCF0 = $49 million
*WACC = 10.84%
*g = 5%

Vop = 49(1+0.05)
(0.1084 0.05)

=
$880.99

$880.99 is horizon value.

Horizon Value :
Is the value of operations at the end of the explicit forecast
period . It is also called the continuing value, and it is equal to
the present value of all free cash flows beyond the forecast
period, discounted back to the end of the forecast period at
the weighted average cost of capital The horizon value (HV)
for 889.99 is calculated using Equation, the constant growth
formula for free cash flows. Why?
Because the value of operations at time N, when it's frees cash
flows stabilize and begin to grow at a constant rate. This is the
value of all FCFs beyond . time N, discounted back to time N
I.e. growth in free cash flows is constant during the forecast.

 Continuing value =

HV
=

Vop at time t
=

FCFt(1+g)
(WACC - g)

Intrinsic Stock Price per Share p:

Is the total value of the equity divided by the number of shares.
Intrinsic Stock Price per Share p = Market Value of Equity /Number
of shares
Market Value of Equity: is the total value of the company minus the
value of the debt and preferred stock
Intrinsic Market Value Added (MVA)= Total corporate value of firm (book value of equity + book value of debt + book value of
preferred stock)
Total corporate value of firm =Non-operating Assets + Value of
Operations
Data for calculations:
Non-operating Assets = $63 ; Value of Operations =$615;Preferred
Stock =$62
Debt = $247;Book Value of Equity =$245;Number of shares = 100

Total corporate value of firm =63+615 = 678

Market Value of Equity = 678 (62+247)= 369
MVA =678 (62+247+245) = 124
Intrinsic Stock Price per Share p =369/100= 3.69