10. An analyst has collected the following information about Franklin Electric:
ID: 2717690 • Letter: 1
Question
10. An analyst has collected the following information about Franklin Electric: Projected EBIT for the next year is $300 million. Projected depreciation expense for the next year is $50 million. Projected capital expenditures for the next year is $100 million. Projected increase in operating working capital next year is $60 million. Tax rate is 40%. WACC is 10%. Cost of equity is 13%. Market value of debt and preferred stock today is $500 million. Number of common shares outstanding today is 20 million.
Explanation / Answer
The free cash flows can be estimated as below:
Next Year From second year to infinity
EBIT 300
Less tax 120
EAT without interest 180
Add Depareciation 50
Operating CF 230 230
Less Increase in assets 160 0
Free Cash flows 70 230
Value of the firm at the end of year 1 = 230/.1 + 70 = 2370
Value at the beginning of the year 1 = 2370/1.1 = 2154.54
Less: Value of debt & preferred stock = 500
Value of common shares = 1654.54
Value of one common share = 1654.54/20 = $ 82.72
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