Good Name (GN) Inc. is expecting earnings before interest and taxes of $500,00 n

Question

Good Name (GN) Inc. is expecting earnings before interest and taxes of $500,00 next year in addition to depreciation expenses of $80,000, and increase in net working capital of $35,000, and an increase in capital spending of $60,000. They expect all of these to grow in perpetuity by 2% every year. GN stock has a required rate of return on equity of 8% and a yield-to-maturity on its debt of 5%. Assume the corporate tax rate for this problem is 0%. The firm's debt-to-equity ratio is currently 1.6 . what is the current value of the entire company?

THE ANSWER IS $11,675,926. But I dont know how they got this answet. Please answer it in a simple way. Thanks

Explanation / Answer

WACC = Wd*Rd + We*Re

Wd = 1.6/2.6 = 0.62

We = 1 - 0.62 = 0.38

Rd = 5%, Re = 8%

WACC = 0.62*5% + 0.38*8% = 6.15%

I think sales number should be 500000

FCFF = 500000 + 80000 - 35000 - 60000 = 485000

Value of firm = FCF*(1+growth rate) / (WACC - growth rate)

   = 485000*(1+2%) / (6.15% - 2%) = 11909444

If sales number is 50000 only

FCFF = 50000 + 80000 - 35000 - 60000 = 35000

Value of firm = FCF*(1+growth rate) / (WACC - growth rate)

   = 35000*(1+2%) / (6.15% - 2%) = 859444

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

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