Question
A. Compute the forecasted FCFF for 2022, 2023, 2024, 2025, 2026 (5 years). B. You computed company's Beta to be equal to 1.3 The 20
A. Compute the forecasted FCFF for 2022, 2023, 2024, 2025, 2026 (5 years).
B. You computed company's Beta to be equal to 1.3 The 20 year Treasury bond rate is 5% and the market equity risk premium equals to 4%. The Yield to Maturity on company's bonds is 8% and the company's tax rate is 35%. The market value of debt is 40 million, market value of equity is 60 million. Compute company's WACC.
C. Assuming after year 5 (2026) the company will enter a steady growth period at g=5.5%, compute the company's Enterprise Value.
D. Assuming Debt of $20 million, cash of $5 million, shares outstanding of 4 million, compute company's price. (rememeber that the financial statements were in '000s, so your EV WILL be in '000)
E. Now change the assumption regarding incremental working capital investment in the first 5 years (decide how you want to change it). Discuss the impact on the share price.
F. Assume the company is private. What methods would you use to compute the cost of equity, needed for WACC? Why do they differ from public company's method?
Income Statement, all in thousand $ | 2021 |
Total Sales | $ 6,235.00 |
Cost of goods sold | $ 3,487.00 |
Selling, General and administrative expenses | $ 987.00 |
EBITDA | $ 1,761.00 |
Depreciation | $ 634.00 |
Operating income (EBIT) | $ 1,127.00 |
Interest expense | $ 432.00 |
Income before tax | $ 695.00 |
Taxes (at 35 percent) | $ 243.25 |
Net income | $ 451.75 |
Dividends | $ 180.70 |
Earnings per share (EPS) | $ 11.29 |
Dividends per share | $ 4.52 |
Assumptions for forecasting (applicable for 5 years) | |
Expected sales growth = 9% in the first year, 7% in second, 10% in third, 6% in fourth and 5% in fifth | |
EBIT margin will equal EBIT margin from 2021 plus 1 percentage point due to increased efficiency | |
tax rate remains at | 35% |
Incremental fixed capital investment (purchases minus depreciation) as a % of increase in sales | 20% |
Incremental working capital investment as a % of increase in sales | 18% |
Step by Step Solution
3.51 Rating (154 Votes )
There are 3 Steps involved in it
Step: 1
A To compute the forecasted FCFF Free Cash Flow to Firm for 2022 2023 2024 2025 and 2026 we need to consider the assumptions provided for sales growth EBIT margin tax rate and incremental capital inve...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started