Consider the case of Morose Otter Hydraulic Manufacturers Inc.: Morose Otter Hydraulic Manufacturers Inc. is expected to generate a free cash flow (FCF) of $210,000 this year, and the FCF is expected to grow at a rate of 18% over the following two years (FCF22 and FCF33). After the third year, however, the company’s FCFs are expected to grow at a constant rate of 8% per year, which will last forever (FCF4 - ∞4 - ∞). If Morose Otter’s weighted average cost of capital (WACC) is 16%, complete the following table and compute the current value of Morose Otter’s operations. Round all dollar amounts to the nearest whole dollar, and assume that the firm does not have any nonoperating assets in its balance sheet and that all FCFs occur at the end of each year. Year CFtt PV(FCFtt) FCF11 $210,000 $181,034 FCF22 $247,800 $184,156 FCF33 $292,404 $187,331 FCF44 $315,796 Horizon Value4- ∞4- ∞ $3,157,960 $2,180,141 Vopop = $3,081,485 Morose Otter’s debt has a market value of $2,311,114, and Morose Otter has no preferred stock in its capital structure. If Morose Otter has 450,000 shares of common stock outstanding, then the total value of the company’s common equity is , and the estimated intrinsic value per share of its common stock is per share. Assume the following: • The end of Year 3 differentiates Morose Otter’s short-term and long-term FCFs. • Professionally-conducted studies have shown that more than 80% of the average company’s share price is attributable to long-term—rather than short-term—cash flows. Is the percentage of Morose Otter’s expected long-term cash flows consistent with the value cited in the professional studies? No, because only 62.76% of the firm’s share price is derived from its expected long-term free cash flows. Yes, because 82.07% of the firm’s share price is derived from its expected long-term free cash flows. No, because the percentage of Morose Otter’s expected long-term cash flows is actually 17.93%. Yes, because 72.22% of the firm’s share price is derived from its expected long-term free cash flows.

Consider the case of Morose Otter Hydraulic Manufacturers Inc.: Morose Otter Hydraulic Manufacturers Inc. is expected to generate a free cash flow (FCF) of $210,000 this year, and the FCF is expected to grow at a rate of 18% over the following two years (FCF22 and FCF33). After the third year, however, the company’s FCFs are expected to grow at a constant rate of 8% per year, which will last forever (FCF4 - ∞4 - ∞). If Morose Otter’s weighted average cost of capital (WACC) is 16%, complete the following table and compute the current value of Morose Otter’s operations. Round all dollar amounts to the nearest whole dollar, and assume that the firm does not have any nonoperating assets in its balance sheet and that all FCFs occur at the end of each year. Year CFtt PV(FCFtt) FCF11 $210,000 $181,034 FCF22 $247,800 $184,156 FCF33 $292,404 $187,331 FCF44 $315,796 Horizon Value4- ∞4- ∞ $3,157,960 $2,180,141 Vopop = $3,081,485 Morose Otter’s debt has a market value of $2,311,114, and Morose Otter has no preferred stock in its capital structure. If Morose Otter has 450,000 shares of common stock outstanding, then the total value of the company’s common equity is , and the estimated intrinsic value per share of its common stock is per share. Assume the following: • The end of Year 3 differentiates Morose Otter’s short-term and long-term FCFs. • Professionally-conducted studies have shown that more than 80% of the average company’s share price is attributable to long-term—rather than short-term—cash flows. Is the percentage of Morose Otter’s expected long-term cash flows consistent with the value cited in the professional studies? No, because only 62.76% of the firm’s share price is derived from its expected long-term free cash flows. Yes, because 82.07% of the firm’s share price is derived from its expected long-term free cash flows. No, because the percentage of Morose Otter’s expected long-term cash flows is actually 17.93%. Yes, because 72.22% of the firm’s share price is derived from its expected long-term free cash flows.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 9P

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Consider the case of Morose Otter Hydraulic Manufacturers Inc.:

Morose Otter Hydraulic Manufacturers Inc. is expected to generate a free cash flow (FCF) of $210,000 this year, and the FCF is expected to grow at a rate of 18% over the following two years (FCF22 and FCF33). After the third year, however, the company’s FCFs are expected to grow at a constant rate of 8% per year, which will last forever (FCF4 - ∞4 - ∞). If Morose Otter’s weighted average cost of capital (WACC) is 16%, complete the following table and compute the current value of Morose Otter’s operations. Round all dollar amounts to the nearest whole dollar, and assume that the firm does not have any nonoperating assets in its balance sheet and that all FCFs occur at the end of each year.

Year	CFtt	PV(FCFtt)
FCF11	$210,000	$181,034
FCF22	$247,800	$184,156
FCF33	$292,404	$187,331
FCF44	$315,796
Horizon Value4- ∞4- ∞	$3,157,960	$2,180,141
	Vopop =	$3,081,485

Morose Otter’s debt has a market value of $2,311,114, and Morose Otter has no preferred stock in its capital structure. If Morose Otter has 450,000 shares of common stock outstanding, then the total value of the company’s common equity is

, and the estimated intrinsic value per share of its common stock is

per share.

Assume the following:

•	The end of Year 3 differentiates Morose Otter’s short-term and long-term FCFs.
•	Professionally-conducted studies have shown that more than 80% of the average company’s share price is attributable to long-term—rather than short-term—cash flows.

Is the percentage of Morose Otter’s expected long-term cash flows consistent with the value cited in the professional studies?

No, because only 62.76% of the firm’s share price is derived from its expected long-term free cash flows.

Yes, because 82.07% of the firm’s share price is derived from its expected long-term free cash flows.

No, because the percentage of Morose Otter’s expected long-term cash flows is actually 17.93%.

Yes, because 72.22% of the firm’s share price is derived from its expected long-term free cash flows.

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