River Walk Tours is expected to have an EBIT of $354,000 next year. Depreciation

Question

River Walk Tours is expected to have an EBIT of $354,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $24,000, $2,000, and $33,000, respectively. All are expected to grow at 7 percent per year for three years. After year 4, the adjusted cash flow from assets is expected to grow at 3.2 percent indefinitely. The company’s WACC is 9.2 percent and the tax rate is 34 percent.

What is the terminal value of the firm’s cash flows?

A.$4,123,008

B.$4,691,189

C.$3,711,052

D.$4,008,051

E.$3,992,419

Explanation / Answer

Answer is Option B $4,691,189.

The calculations are given below:

RIVER WALK TOURS. The Free Cash Flows to the firm for the coming year (1st year) is arrived at as below: EBIT 354000 Less: Tax @ 34% 120360 EAT 233640 Add: Depreciation 24000 Free operating Cash Flows 257640 NWC Increase -2000 Capital Spending -33000 Free Cash flows to firm 222640 The FCFF for the various years will be: g=3.2% with growth rate of 7% Terminal 1 2 3 4 Year FCFF 222640.0000 238224.8000 254900.5360 272743.5735 281471.3679 Discounted value of Terminal year =281471.3679/(0.092-0.032) 4691189.47 rounded off to 4,691,189

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