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Chapter 13Corporate Valuation, Value-Based Management, andCorporate Governance
ANSWERS TO END-OF-CHAPTER QUESTIONS
13-1 a. Assets-in-place, also known as operating assets, include the land, buildings,machines, and inventory that the firm uses in its operations to produce its productsand services. Growth options are not tangible. They include items such as R&D andcustomer relationships. Financial, or nonoperating, assets include investments inmarketable securities and non-controlling interests in the stock of other companies.b. Operating current assets are the current assets used to support operations, such ascash, accounts receivable, and inventory. It does not include short-term investments.Operating current liabilities are the current liabilities that are a natural consequence of the firm’s operations, such as accounts payable and accruals. It does not includenotes payable or any other short-term debt that charges interest. Net operatingworking capital is operating current assets minus operating current liabilities.Operating capital is sum of net operating working capital and operating long-termassets, such as net plant and equipment. Operating capital also is equal to the netamount of capital raised from investors. This is the amount of interest-bearing debtplus preferred stock plus common equity minus short-term investments. NOPAT isthe amount of net income a company would generate if it had no debt and held nofinancial assets. NOPAT is a better measure of the performance of a company’soperations because debt lowers income. In order to get a true reflection of acompany’s operating performance, one would want to take out debt to get a clearerpicture of the situation. Free cash flow is the cash flow actually available fordistribution to investors after the company has made all the investments in fixedassets and working capital necessary to sustain ongoing operations. It is the mostimportant measure of cash flows because it shows the exact amount available to allinvestors.c. The value of operations is the present value of all the future free cash flows that areexpected from current assets-in-place and the expected growth of assets-in-placewhen discounted at the weighted average cost of capital:
The terminal, or horizon value, is the value of operations at the end of the explicitforecast period. It is equal to the present value of all free cash flows beyond theforecast period, discounted back to the end of the forecast period at the weightedaverage cost of capital:.gWACC)g1(FCF
The corporate valuation model defines the total value of a company as the value of operations plus the value of nonoperating assets plus the value of growth options.