The JD Corporation reported net income of $65 million for last year. Depreciatio

Question

The JD Corporation reported net income of $65 million for last year. Depreciation expense totaled $18 million and capital expenditures came to $6 million. Free cash flow is expected to grow at a rate of 5.5 % for the foreseeable future. The firm faces a 40% tax rate and has a 0.48 debt to equity ratio with $205 million (market value) in debt outstanding. JD Corporation's equity beta is 1.25, the risk-free rate is currently 3% and the market risk premium is estimated to be 7.5%. What is the current total value of the firm's equity (in millions)?

Explanation / Answer

Free cash flows = $65 Million+$18 Million-$6 Million = $77 Million

Required return (CAPM) = Rf+×Rp

Rf is risk free return

Rp is risk premium

= 3%+1.25×7.5%

= 12.38%

Firm value:

= $77 Million÷(12.38%-5.5%)

= $1,120 Million

Value of equity:

= $1,120 Million-$205 Million

= $915 Million

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