Question

Reynolds Construction's value of operations is $750 million based on the free cash flow valuation model. Its balance sheet shows $50 million of short-term investments that are unrelated to operations, $100 million of accounts payable, $100 million of notes payable, $200 million of long-term debt, $40 million of common stock (par plus paid-in-capital), and $160 million of retained earnings. What is the best estimate for the firm's value of equity, in millions

Answer 1

Answer:

The best estimate for the firm's value of equity, in millions is $500 million

Explanation:

Given:

Free cash flow valuation model = $750 million

Short-term investments that are unrelated to operations = $50 million

Accounts payable = $100 million

Notes payable = $100 million

Long-term debt = $200 million

Common stock (par plus paid-in-capital) = $40 million

Retained earnings = $160 million

Firm value of equity = Free cash flow value - Debt - Notes payable + Investments

= ($750 - $200 - $100 + $50) million = $500 million