ezto.mhedu Connect FINANCE al Project (Chapter 13 Assignment) Question 1 (of 1)

Question

ezto.mhedu Connect FINANCE al Project (Chapter 13 Assignment) Question 1 (of 1) value: 8.00 points You need to estimate the value of Laputa Aviation. You have the following forecasts (in millions of dollars) of its profits and of its future investments in new plant and working capital: Year Earnings before interest, taxes, depreciation, and amortization (EBITDA) Depreciation Pretax profit Tax at 40% Investment 98 113 78 38 48 53 58 40 50 60 60 16 20 24 24 14 17 20 22 118 From year 5 onward, EBITDA, depreciation, and investment are expected to remain unchanged at year-4 levels. Laputa is financed 40% by equity and 60% by debt. Its cost of equity is 13%, its debt yields 9%, and it pays corporate tax at 40%. a. Estimate the company's total value. (Do not round intermediate calculations. Enter your answer in millions rounded to the nearest whole dollar amount.) Total value million b. What is the value of Laputa's equity? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Laputa's equity million

Explanation / Answer

Year 1 2 3 4 5 Value of Firm EBITDA 78 98 113 118 Depn 38 48 53 58 Pretax Profit 40 50 60 60 Tax 40% 16 20 24 24 PAT 24 30 36 36 OCF 62 78 89 94 1113.744 Dis. Fact. 0.922169 0.850396 0.784208 0.723173 0.666887 PV         57.17         66.33         69.79         67.98      742.74                 1,004 Investment 14 17 20 22 22 Value of the perpetuity C/r=94/8.44%=1113.744 WACC=.4*13%+.6*9%*(1-.4) 8.44% Total Value of the firm 1004 40% of the value is equity so equity will be =1004*40%=401

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