Lahore School of Economics

Financial Management II
Corporate Valuation
Assignment 8

Examples
1. Over the years, McLaughlin Corporation's stockholders have provided $35,000,000 of capital, when they purchased
new issues of stock and allowed management to retain some of the firm's earnings. The firm now has 2,000,000 shares of
common stock outstanding, and it sells at a price of $30 per share. How much value has McLaughlin's management added
to stockholder wealth over the years, i.e., what is McLaughlin's MVA?

2. 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 2012?

3. 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?

Problems for Assignment

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%.

a) What is Dozier’s terminal, or horizon, value?

b) What is the firm’s value today?
c) Suppose Dozier has $100 million of debt and 10 million shares of stock outstanding. What is your estimate of the
current price per share?