Value the company given the following information. Calculate the firm\'s free ca

Question

Value the company given the following information.

Calculate the firm's free cash from assets and free cash flow from/to equity. What is the required rate of return for common shareholders and WACC? Calculate the market value of the firm estimating the present value of the free cash flow. Then estimate the market value of equity. How would your answer change for an unleveraged firm?

EBIT 1 2 3 4 Depreciation 480 530 580 605 Capital Expenditures 160 140 130 110 Increase in Working Capital 25 20 15 12

Explanation / Answer

assuming that increase in EBIT by 100 every year

free cash flow form equity

       cash flow (1+g) / cost of equity - growth rate )

                  462 (1 +0.4)/ 0.166-0.04

            = $ 3813

market value of firm =   free cash flow / ( 1 + WACC)    + market value of equity

                         = 3813 / (1 + 0.1272)   + 1800

                       = $ 5183

market value of equity = market value of firm - value of debt

                                = 5183- 1200

                                 = $3983

first of all calculate cost of equity cost of equity = risk free rate + beta * risk premium 10 +1.1*6 16.60%

Related Questions

Navigate

• Browse (All)
• Browse V
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.