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Lahore School of Economics Financial Management II Corporate Valuation
Lahore School of Economics Financial Management II Corporate Valuation
Financial Management II
Corporate Valuation
1. Henderson Industries has $500 million of common equity; its stock price is $60 per share, and its Market Value Added
(MVA) is $130 million. How many common shares are currently outstanding?
2. Dozier Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs)
during the next 3 years, after which FCF is expected to grow at a constant 7% rate. Dozier’s WACC is 13%.
3. For 2012, Everyday Electronics reported $22.5 million of sales and $19 million of operating costs (including
depreciation). The company has $15 million of investor-supplied operating capital. Its weighted average cost of capital
is 8% and its federal-plus-state income tax rate was 35%. What was the firm's Economic Value Added (EVA), that is,
how much value did management add to stockholders' wealth during 2011?
4. Barrett Industries invests a large sum of money in R&D and has major potential for growth. A major pension fund is
interested in purchasing Barrett's stock. The pension fund manager has estimated Barrett's free cash flows for the next 4
years as follows: $3 million, $6 million, $10 million, and $15 million. After the fourth year, free cash flow is projected to
grow at a constant 7%. Barrett's WACC is 12%, the market value of its debt and preferred stock totals $60 million, and it
has 10 million shares of common stock outstanding.
a) What is the present value of the free cash flows projected during the next 4 years?
b) What is the firm's horizon, or continuing, value?
c) What is the firm's total value today?
d) What is an estimate of Barrett's price per share?
Using the corporate valuation model approach, what should be the company’s stock price today?