Today is December 31, 2016. The following information applies to Harris Corp. After-tax operating income [(EBIT)(1 middot t)] for 2017 is expected to be $950 million.
Depreciation expense for 2017 is expected to be $190 million. Capex for 2017 is forecast to be $380 million.
Net operating capital is expected to be flat. Free cash flow is expected to grow at a 4% annual rate. Cost of equity is 13%. WACC is 9%.
The market value of the debt is $5.2 billion. Additional debt of $100 million is forecast for 2017. The estimated tax rate is 40%. Annual interest expense is $283 million. The company has no preferred stock outstanding. The firm has 250 million common shares outstanding.
a) Using the corporate valuation model, what Is the estimated value of the common shares (FCFF)?
b) Using the Free Cash Flow to Equity (FCFE) method of valuation, what is the estimated value of the common shares?