Question

Charles Underwood Agency Inc.’s FCFs are expected to grow at a constant rate of 3.90% per year in the future. The market value of Charles Underwood Agency Inc.’s outstanding debt is $85,154 million, and its preferred stocks’ value is $47,308 million. Charles Underwood Agency Inc. has 450 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 11.70%.
Calculate the total firm value.

Answer 1

The following information is missing:

net operating after tax cash profit = $17,400 million

net capital expenditures = $2,610 million

net operating working capital increase of = $30 million

Answer:

$189,231 million

Explanation:

growth rate of future cash flows = 3.90%

WACC = 11.70%

OFCF₁ = $17,400,000,000 - $2,610,000,000 - $30,000,000 = $14,760,000,000 or $14,760 million

to determine the firm's total value we can use the operating free cash flow method:

firm's total value = operating free cash flow₁ / (WACC - growth rate) = $14,760 million / (11.70% - 3.90%) = $189,230.77 or $189,231 million

A firm's total value includes the market value of its debt and equity.