The following information is given about a corporation. All figures are in milli
ID: 2460328 • Letter: T
Question
The following information is given about a corporation. All figures are in million dollars.
Sales = 900
Long term debt = 500. The current yield to maturity is 8.8 percent. The coupon rate is zero. The maturity is 10 years.
Find Capital expenditures and the change in working capital.
The equity Beta of this company is =1.4
ROE = 15 %,
Tax rate = 30%
Growth rate of the free cash flow = 120 %, 50 %, and 5% thereafter.
Risk-free rate = 4%
Market risk premium = 8 %
2009
2010
2009
2010
Current Assets
200
300
Current liabilities
100
150
Fixed Assets
500
600
Long-term Debt
500
500
Equity
100
250
Total Assets
700
900
SE and liabilities
700
900
2009
2010
Sales
800
900
COGS
500
500
Depreciation
100
100
Tax rate 30%
Using the information in the tables, calculate the free cash flow and weighted average cost of capital (WACC) to find the value of this corporation at the end of year 2010. Assume that debt ratio, yield to maturity, risk-free rate, market risk premium, beta and other relevant ratios will stay the same for the foreseeable future
2009
2010
2009
2010
Current Assets
200
300
Current liabilities
100
150
Fixed Assets
500
600
Long-term Debt
500
500
Equity
100
250
Total Assets
700
900
SE and liabilities
700
900
Explanation / Answer
Applying CAPM,
Cost of equity = risk free rate + beta of equity x market risk premium = 4% + 1.4 x 8% = 15.2%
After tax cost of debt = Yield x (1 - tax rate) = 8.8% (1- 30%) = 6.16%
Weighted Average cost of capital = weight of equity x cost of equity + weight of debt x after tax cost of debt = (250/750) * 15.2% + (500/250) * 6.16% = 17.39%
EBIT = Sales - COGS - depreciation = 900 - 500 - 100 = $300million
FCF
= EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure
= 300 (1-30%) + 100 - 50 - 100
= 210 + 100 - 150
= $160 million
FCFF0 = $160 million
FCFF1= 160 (1 + 120%) = $352 million
FCFF2 = 352 (1+50%) = $528 million
FCFFn = $528 (1+5%) = $554.40 million
Firm Value
= FCFF1 / (1+17.39%) + FCFF2 / (1+17.39%)^2 + FCFFn / (17.39% - 5%) x [ 1/ (1+17.39%)^3]
= 352 / (1.1739) + $528 / (1.1739)^2 + [$554.40 / 12.39%] x [1/ (1.1739)^3
= $3449 million
Year 2009 2010 Current assets $ 200 $ 300 Less: Current Laibilities $ 100 $ 150 Working capital $ 100 $ 150 Cincrease in working capital $ 50Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.