u next year while net capital Haintain its existing deb iplhy wants to increase

Question

u next year while net capital Haintain its existing deb iplhy wants to increase its cash balance by S 20 win dividends next year t to capital ratio, how much can it afford to pay in (2 points) million next yea 5- You have been asked to value an entertainment company byAT&T.; The firm' 33.33% tax rate. The firm for the next 3 years for a possible acquisition s current pre-tax operating income is s 150 million, and it has a lowing table summarizes the estimates you have made for the st Term. year (4) Exp. Growth in Operating Income 15% I 5% 1 5% 5% ROC 20% 15% 20% 20% Cost of Capital 11% 10% 12% The firm will be in stable growth after year 3 a. Estimate the expected free cash flows to the firm every year for the next 3 years.Q points) b. b. Estimate the terminal value of the firm, i.e., the value at the end of the third year (2 points) c. Estimate the value per share today.if the firm has $ 800 million in debt outstanding and 100 million shares.

Explanation / Answer

a]   

$ in millions

b) Terminal value:

Terminal value at the end of third year = FCF4 / (r-g)

FCF4 = Free cash flow at theend of year 4 = $159.7m

r = cost of capital = 10%

g = growth rate = 5%

terminal value= 159.7 / (10%-5%) = $ 3,194 m

c)Value per share

Value of firm= FCF from year 1 to 3 + terminal value

= 115.01+ 132.26+ 152.10+ 3194

= $ 3593.36

Value of equity = value of firm - value of debt

= 3593.36 - 800

=$ 2793.36 m

Number of shares = 100million

Value per share = value of equity / no of shares

= 2793.36/ 100

= $27.93

Year - 0 Year -1 Year -2 Year -3 Term. Year -4 a Expected operating income growth rate 15% 15% 15% 5% b Increase in Operating income 22.50 25.88 29.76 11.41 (150*15%) (172.5*15%) c Operating Income 150 172.50 198.38 228.13 239.54 (150+b) (172.5+b) d Tax rate t 33.33% e 1-t 66.67% f After tax expected operating cash flows (c*e) 100.01 115.01 132.26 152.10 159.70

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

---

---

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