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Chapter Four
Corporate Valuation
Required readings:
Ehrhardt, M.C. Brigham, E. F. (2011), Financial Management: Theory and
Practice, 13th Ed., South-Western Cengage Learning. (Chapter 7,9,13,)
Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan (2013),
Fundamentals of Corporate Finance, 10th ed. McGraw-Hill. (Chapter 8)
Overview of Corporate Valuation
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claims on it.
Value of Equity - the value of common stock for a
distribution to investors.
FCF = Net operating profit after taxes - required
owning assets
The required rate of return for each period based
regular dividends.
Corporate valuation model - focuses on sales,
1.15 (1.08)
VS 1.242 / 0.054 23.00
0.134 0.08
Cont’d……….
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For example:
With a 14% required rate of return, current dividend
n
FCF
V op t1 (1 WACC
t
) t
t
Cont’d………
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Example:
Mayo Inc. has the following forecasted free cash
flows (in millions) for the years 2011 to 2014. A
10.84% cost of capital, and a 5% growth rate
Cont’d…….
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Actua Projected
l
Calculate FCF 2010 2011 2012 2013 2014
Net Operating WC 212.00 250.00 275.00 289.00 303.00
Net Plant & Equip. 279.00 310.00 341.00 358.00 376.00
Net Operating Capital 491.00 560.00 616.00 647.00 679.00
Investment in 69.00 56.00 31.00 32.00
operating capital
NOPAT 43.80 51.00 33.00 77.40 81.00
Less Investment in 69.00 56.00 31.00 32.00
operating Capital
Free Cash Flow -18.00 -23.00 46.40 49.00
(FCF)
Cont’d………
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49 (1 0 .05 ) 51 .45
Vop (12 / 31 / 2014 ) 880 .99
0 .1084 0 .05 0 .0584
This $880.99 million is called the firm’s terminal or
horizon value, because it is the value at the end of the
forecasted period.
It is also sometimes called a continuing value.
It is the amount that Mayo Inc. could expect to receive
if it sold its operating assets on December 31, 2014.
Cont’d……….
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Questions?
Thank You!