Advanced Principles of Financial Management

1. Calculate the Intrinsic Value of Your Company:
2. Calculating the Cost of Capital:

The WACC is computed from the given variables from the page for Tootsie Roll Industries since they reflect the right parameters in use at the company.  

WACC= E ÷ (E+D) × Cost of equity + D÷ (E+D) ×Cost of Debt ×(1-Tax Rate)

0.9665×4.678+0.0035×1.2978× (1-29.918%) 

4.668

b. Calculating Free Cash Flow to the Firm

Free Cash flow per share= (Cash flow from operations+ cash flow from capital expenditure) ÷ Shares outstanding 

(98.55+-16.09)÷64.106

(82.46)÷64.106

=1.29

3. Calculating Firm Value:

Firm Value = FCFF * (1+g) / (WACC – g)

                =1.29× (1+0.03) ÷ (4.668-0.03)

      =1.19×1.03÷4.638

             =1.19×0.2221

      =0.2643 

Hence, the firm value is $2.643 billion 

2. Comparison to Market Capitalization:

Based on the key statistics found on the Yahoo page, the market cap value represents the market value of the current outstanding shares of the company. The value is also called market capitalization since it signifies the capital value of the company. In other words, the term can be used to describe the value of the business. The given value is different from the calculated value. The difference is $ 0.314 Billion. The difference in this case was due to the many variables in the computation. An investor would have to choose between the given parameters to make a good decision on whether to invest now in the company or wait later when the values increase (Satyaprasad, 2010). Another reason for difference was the growth rate assumption used in the computation. In the calculations, a growth rate of 3% was applied meaning the variables in the other parameters were greatly affected. The growth rate led to a firm value of $2.643 billion which was on the higher side compared to the given firm value of $ 2.329 billion on the Yahoo Finance page for Tootsie Roll Industries. 

References

Satyaprasad, B. G., & Raghu, G. A. (2010). Advanced financial management. Mumbai [India: Himalaya Pub. House. 

https://finance.yahoo.com/quote/TR/ Accessed on 25^th June 2017http://tootsie.com/financials/ Accessed on 25^th June 2017