Icarus Airlines is proposing to go public, and you have been given the task of e

Question

Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 33% of the company’s present value, and you believe that at this capital structure the company’s debtholders will demand a return of 7% and stockholders will require 14%. The company is forecasting that next year’s operating cash flow (depreciation plus profit after tax at 40%) will be $71 million and that investment expenditures will be $33 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year.

What is the value of the company’s equity? (Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place.)

Company’s equity

Hint it is not 543 and 364; intermediate calculations should not be rounded; part b needs a number after the decimal

$  million

Explanation / Answer

Calculation Of Value of the Business :- A) Value of The Business can be calculated by capitalizing the organization free cash flow with growth rate. i.e., Company Value = Free Cash Flows(Cash Flow from operating activities-Capital expenditure)/Perpetual Growth = (71-33)/4% TOTAL VALUE = 950 Millions B) It was given that 33% of oragnisation structure is debt therefore remaining 67% equals to Equity fund. Value of company equity is 67% of Total Value = +950*67% 636.5 millions

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