13-4

A company has capital of $200 million. It has an EROIC of 9%, forecasted constant growth
of 5%, and a WACC of 10%. What is its value of operations? What is its intrinsic MVA?

Capital n(EROIC n−WACC )

Vop n=Capital n+
WACC−g

$ 200(0.09−0.1)
Vop n=$ 200+
0.1−0.05

−2
Vop n=$ 200+
0.05

Vop n=$ 160 million

MVA=Value of operations−Capital

MVA=$ 160−$ 200

MVA=−$ 40 million

13-6

Brooks Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and
$100,000 for the next 2 years, respectively after the second year, FCF is expected to grow at a
constant rate of 8%. The company’s weighted average cost of capital is 12%
 a. What is the horizon value of operations?
FCF (1+ g)
Horizon value=
WACC−g
$ 100,000(1+ 0.08)
Horizon value=
0.12−0.08
Horizon value=$ 2,700,000

b. Calculate the value of Brook’s operations

g = 8%
WACC = 12%

Year 1 2 Horizon value

FCF $80,000 $100,000 $2,700,000
Discounted value $71,428.57 $79,719.39 $2,152,423.47

Vop = $71,428.57 + $79,719.39 + $2,152,423.47

= $2,303,571.43

13-8

The balance sheet of Hutter Amalgamated is shown below. If the 12/31/2010 value of
operations is $756 million, what is the 12/31/2010 intrinsic market value of equity?

Assets Liabilities and Equity

Cash $20 Accounts payable $19

Marketable securities $77 Notes payable $151

Accounts receivable $100 Accruals $51

Inventories $200 Total current liabilities $221

Total current assets $397 Long term bonds $190

Net plant and equipment $279 Preferred stock $76

Common stock $100

Retained earnings $89

 Common equity $189

Total assets $676 Total liabilities and equity $676

Net operating working capital = (Cash + Account receivable + Inventories) – (Account

payable + Accruals)

= (20 + 100 + 200) – (19 + 51)

= $230 million

Net operating capital = Net operating working capital + Net plant and equipment

= $230 + $279

= $509 million

Value of operations $756

+Value of nonoperating assets $77
Total intrinsic value of the firm $833
-Debt $417
Intrinsic value of equity $416 million

Notes:

1. Value of nonoperating assets = marketable securities

2. Debt = notes payable + long term bond + preferred stock