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Unformatted text preview: Chapter 15 Corporate Valuation, Value-Based Management, and Corporate Governance ANSWERS TO END-OF-CHAPTER QUESTIONS 15-1 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 products and services. Growth options are not tangible. They include items such as R&D and customer relationships. Financial, or nonoperating, assets include investments in marketable securities and non-controlling interests in the stock of other companies. b. Operating current assets are the current assets used to support operations, such as cash, 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 firms operations, such as accounts payable and accruals. It does not include notes payable or any other short-term debt that charges interest. Net operating working capital is operating current assets minus operating current liabilities. Operating capital is sum of net operating working capital and operating long-term assets, such as net plant and equipment. Operating capital also is equal to the net amount of capital raised from investors. This is the amount of interest-bearing debt plus preferred stock plus common equity minus short-term investments. NOPAT is the amount of net income a company would generate if it had no debt and held no financial assets. NOPAT is a better measure of the performance of a companys operations because debt lowers income. In order to get a true reflection of a companys operating performance, one would want to take out debt to get a clearer picture of the situation. Free cash flow is the cash flow actually available for distribution to investors after the company has made all the investments in fixed assets and working capital necessary to sustain ongoing operations. It is the most important measure of cash flows because it shows the exact amount available to all investors. c. The value of operations is the present value of all the future free cash flows that are expected from current assets-in-place and the expected growth of assets-in-place when discounted at the weighted average cost of capital: ( 29 . WACC 1 FCF V 1 t t t 0) time op(at = + = The terminal, or horizon value, is the value of operations at the end of the explicit forecast period. It is equal to the present value of all free cash flows beyond the forecast period, discounted back to the end of the forecast period at the weighted average cost of capital: . g WACC ) g 1 ( FCF g WACC FCF V N 1 N N) time op(at- + =- = + 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....
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