Question
A group of investors plan to open a special-purpose-company that will operate in the United States. The firm will last just 5 years, at the
A group of investors plan to open a special-purpose-company that will operate in the United States. The firm will last just 5 years, at the end of which its value will be zero. The firm will produce a Free Cash Flow (FCF) of 40 million per year. The initial investment to set up the firm is estimated in 120 million (Property, Plant and Equipment, plus net working capital). The industrys equity beta (leverage beta) is 2.1 with an average D/E ratio of 0.4. The investors plan to use a capital structure of D/E 0.75. They will get debt financing at 4% rate. The market risk premium is 7% and the risk-free rate is 3%. The industry (and the firm) has a tax rate of 30%. How much is the company worth now (enterprise value) (use Hamada formula)?
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