Work in Finance

Corporate  Valuation  

An   analyst   has   been   assigned   the   task   of   estimating   the   intrinsic   value   of   Natory   Corporation.     For  

this   purpose,   he   is   considering   several   approaches.   Selected   financial   data   for   the   current   year   are  

presented  in  Table  1  (All  numbers  are  in  $  millions).        

Table  1.  Natory  Corporation  -­‐  Selected  financial  data  

Net  income  

Depreciation  

Capital  expenditures  

Change  in  working  capital  

New  debt  issuance  

Debt  repayments  

37.5  

10.5  

15  

5.5  

11.0  

7.0  

The  company  is  reporting  the  assets  at  historical  costs  and  has  a  high  proportion  of  intangible  or  “off  

the  books”  assets.  Moreover,  the  company  is  reinvesting  all  the  earnings.  

After  reviewing  the  Natory’s  financial  statements  and  future  perspectives,  the  analyst  concludes  the  

following:  

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Natory’s  FCFE  are  expected  to  grow  10  percent  a  year  over  the  next  three  years;  thereafter  

the  growth  rate  will  become  stable  at  2%/year  (indefinitely)  

The  market  value  of  debt  is  considered  to  be  $100  million  

At   the   moment   of   valuation   the   market   price   is   $50   and   Natory   has   8   million   shares  

outstanding  

The  book  value  of  equity  is  $96  million  

Natory’s  beta  is  1.3  

The  government  bond  yield  is  4  percent,  and  the  market  risk  premium  is  5  percent  

The  before-­‐tax  cost  of  debt  was  estimated  at  6  percent  ...