The Corporate Value Model is a useful way of valuing companies that are privately owned because it
relies on the discounting of future cash flows at an appropriate discount rate to measure the overall
value of a firm. Most of the other methods require comparative data on price, beta, dividends per share, and
of similar publicly traded firms for estimates of inputs to be used in applying the respective models.
Calculation of Citrus Glow's stock price based on the Corporate Value Model
1) Find the market value (MV) of the firm.
2) Find PV of firm’s future FCFs
3) Subtract MV of firm’s debt and preferred stock to get MV of common stock.
MV of stock = MV of Firm - MV of debt and preferred stock (if any)
Divide MV of common stock by the number of shares outstanding to get intrinsic stock price (value).
P0 = MV of common stock / # of shares
Also called the free cash flow method. Suggests the value of the entire firm equals the present value of the fir
Remember, free cash flow is the firm’s after-tax operating income less the net capital investment
where net capital investment is equal to the change in net fixed assets
FCF = NOPAT – Net capital investment
Change in Fixed assets
Free Cash Flow (2009)
Expected growth rate of free cash flows =
Required rate of return on equity (based on CAPM Model)
2. Comment on Lisa’s preference of the Corporate Value Model.
Based on her approach, what would Citrus Glow’s selling price per share be
if they were to issue 5 million shares?
Risk-fee rate (T-Bill rate)
Market Risk Premium
Beta (Average of 3 competitors' betas)
Required rate of return on equity
Cost of Debt
After-tax cost of debt
FCF in 2010
FCF in 2011
FCF in 2012
Firm Value in 2009
Number of shares
Price per share
t are privately owned because it
unt rate to measure the overall
a on price, beta, dividends per share, and earnings per share
applying the respective models.
get intrinsic stock price (value).
ire firm equals the present value of the firm’s free cash flows.
ss the net capital investment
hange in net fixed assets
e per share be
Long term debt is 0
2007 2008 2009
Price/Earnings 9.2 10.3 20
Price/Book 1.2 1.1 0.76
Price/Sales 3.00 1.63 1.81
Price/Cash Flow 0.11 0.13 0.06
Risk-free rate 4%
Market Risk Premium 8%
Required Rate (CAPM)= 7.78%
Number of shares to be issued 358,800
Estimated Price Per share 2.57
Total Value of Equity 922,219.17
Dan's estimate under the Price-ratio approach turns out to be between $31 and $63 with an average of $47 as compared w
Under Dan's approach the firm's value is determined in relationship with the relative valuation ratios of the firm's top
3 competitors. So it would give a more realistic value. Also, only 1-year ahead growth estimates have to be made reducing
forcasting error. However, beta and required return estimates are still required.
3. How does Lisa’s price estimate compare with Dan’s price
price-ratio models? What are the pros and cons of Dan’s preferred
Average Current Level
End of year
13.2 86,592 Net Income -13.05% 75,289 991,311
1.0 1,404,514 Book Value 1.17% 1,420,980 1,449,399
2.1 699,833 Sales 1.79% 712,375 1,527,805
0.1 86,592 Cash Flow -13.05% 75,289 7,356
average of $47 as compared with Lisa's estimate of $57.91
n ratios of the firm's top
tes have to be made reducing
e compare with Dan’s price estimate based on the
and cons of Dan’s preferred approach?
Price at end
2007 30% 1.95
2008 30% 2.54
2009 30% 3.30
Dividend in Year 0 1.50$
Required Rate 7.78%
Intrinsic Value $40.46
Joe's estimate of $207.12 is the lowest of the 3. However it is much closer to Lisa's estimate of $5.298
than Dan's estimate of $2.57
4. How far off would Joe’s price estimate if he were to use a 3-stage approach with growth
assumptions of 30% for the first 3 years, followed by 20% for the next two years, and a long-term
growth assumption of 6% thereafter. Assume that the firm pays a dividend of $1.50 per share at th
end of the first year.
e approach with growth
o years, and a long-term
of $1.50 per share at the
Lisa's estimate 5.298409 based on Corporate Value Model
Dan's Estimate 2.57 based on Price ratio models
Joe's estimate $40.46 based on Dividend Discount Model
Since the estimated values are based on fairly conservative expectations a simple
average would be fine. So a offer price of around $50 per share would be reasonable. This price is
similar to the competitors' current prices.
5. Based on all three estimates and on the valuation figures for the three competitors how much pe
Glow is really worth? Explain your rationale.
sonable. This price is
hree competitors how much per share do you think that Citrus