You need to estimate the value of Laputa Aviation. You have the following foreca

Question

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:

From year 5 onward, EBITDA, depreciation, and investment are expected to remain unchanged at year-4 levels. Laputa is financed 50% by equity and 50% by debt. Its cost of equity is 19%, its debt yields 10%, 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.)

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b. What is the value of Laputa’s equity? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

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Year 1 2 3 4 Earnings before interest, taxes,
depreciation, and amortization (EBITDA) 88 108 123 128 Depreciation 28 38 43 48 Pretax profit 60 70 80 80 Tax at 40% 24 28 32 32 Investment 17 20 23 25

Explanation / Answer

Year (n) 1 2 3 4 Earnings before interest, taxes, depreciation, and amortization (EBITDA) 88 108 123 128 Depreciation 28 38 43 48 Pretax profit (A) 60 70 80 80 Tax at 40% (B) 24 28 32 32 Operating cash flow (A-B) 36 42 48 48 Less : Investment 17 20 23 25 Free cash flow 19 22 25 23 Value at the end of each year ( Freecash flow ( 1+ WACC) ^ n) 16.81 17.23 17.33 14.11 Cost of debt = 10 % * (1-40%) = 6 % Cost of equity = 19% Calculation of WACC Type Weights Cost of finance Weighted Average cost of capital Debt 0.5 6% 3% Equity 0.5 19% 10% WACC = 10 % +3 % = 13% Value at the end of year 4 ( 23/13%) 176.92 Total Value of the firm (value at the end of year 1 + value at the end of year 2 + value at the end of year 3 + value at the end of year 4) 65.48 Value of the debt ( Total Value * 50%) 32.74 Value of equity ( Value of firm - Value of debt) 32.74

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