The candy coat Co. earned $25 million before interest and taxes on revenues of $

Question

The candy coat Co. earned $25 million before interest and taxes on revenues of $70 million last year. Capital expenditures were $20 million, and depreciation was $12 million. The additions to working capital were $6 million. The firm’s weighted average cost of capital is 10.45%, the marginal tax rate is 40%, and the expected cash flow growth is 5%. The market value of debt is $25 million. The value of the firm’s equity is? (Write down the calculation process with your answer, otherwise you will receive 0)

Explanation / Answer

FCF = OPerating cash flows - CAPEX

OCF= EBIT- TAx + Depreciation + change in working capital

= 25 - 25*40% + 12 + 6

= $33 million

FCF = 33 - 20 = $13 million

Value of the firm = FCF/ (WACC- growth)

= 13/ (10.45%- 5%)

= 238.53 million

Value of equity = Value of firm - debt

= 238.53 - 25

= $ 213.53 million

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