Question
At the end of the financial year 2019, Strong Tool Company anticipated its revenues, expenses, capital expenditures and changes in working capital over the next
At the end of the financial year 2019, Strong Tool Company anticipated its revenues, expenses, capital expenditures and changes in working capital over the next 3 years (2020-2022) to be as shown in the table below.
Year | Revenues | Expenses | Capital Expenditures | Incremental Changes in Working Capital |
2020 | $400,000 | $200,000 | $40,000 | $15,000 |
2021 | $410,000 | $200,000 | $60,000 | $25,000 |
2020 | $420,000 | $200,000 | $80,000 | $35,000 |
The company estimated the depreciation charges to be fixed at $15,000 every year. The firm has a tax rate of 28% and a cost of capital of 15%.
Requirement 1: You are required to estimate the free cashflow available to the firm (FCFF) for the period of 2020-2022. Calculate each of the missing values in the table below (there are 20 missing values in total).
Year | 2020 | 2021 | 2022 |
EBIDTA | 1) | 2) | 3) |
Depreciation | 15,000 | 15,000 | 15,000 |
EBIT | 4) | 5) | 6) |
TAXES | 7) | 8) | 9) |
EAT | 10) | 11) | 12) |
Depreciation | 15,000 | 15,000 | 15,000 |
Capital Expenditure | 13) | 14) | 15) |
Increase in Working Capital | 16) | 17) | 18) |
FCFF | 19) | 20) | 47,600 |
Requirement 2 Free cash flows beyond year 3 are estimated to grow at an annual rate of 5%. Apply the growing perpetuity formula to estimate the terminal value of Strong Tool Company as of year 3. What is the value of the terminal value today?
Requirement 3 Strong Tool Company's current value of existing debt is $80,000. Estimate the value of the equity of the company by applying the free cash flow to the firm method.
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