Chap 2 Handout Problem Consider the following 4-year projections for Peg Inc.: Actual 2007 Forecast 2009 2008 2010 2011 90 120 190 100 30 150 50 20 40 55 2 2 3 4 4 EBIT Depreciation Increase in deferred taxes Capital expenditures Net working capital change debt financing 50 92 63 64 69 10 -5 -5 15 15 20 5 10 15 Corporate tax rate: 38% Cost of equity is 16%, cost of debt is 10%, and debt ratio is 50% Interest coverage ratio (defined as EBIT-to-interest expense) is 10 After 2011, EBIT are expected to grow at 3% a. b. Estimate the free cash flows of Peg Inc. for the 4 years 2008 to 2011 and compute the enterprise value as of year-end 2007. Estimate the free cash flows to equity holders for the 4 years 2008 to 2011 and compute the equity value as of year-end 2007 Compute the debt value as of year-end 2007 C. Chap 2 Handout Problem Consider the following 4-year projections for Peg Inc.: Actual 2007 Forecast 2009 2008 2010 2011 90 120 190 100 30 150 50 20 40 55 2 2 3 4 4 EBIT Depreciation Increase in deferred taxes Capital expenditures Net working capital change debt financing 50 92 63 64 69 10 -5 -5 15 15 20 5 10 15 Corporate tax rate: 38% Cost of equity is 16%, cost of debt is 10%, and debt ratio is 50% Interest coverage ratio (defined as EBIT-to-interest expense) is 10 After 2011, EBIT are expected to grow at 3% a. b. Estimate the free cash flows of Peg Inc. for the 4 years 2008 to 2011 and compute the enterprise value as of year-end 2007. Estimate the free cash flows to equity holders for the 4 years 2008 to 2011 and compute the equity value as of year-end 2007 Compute the debt value as of year-end 2007 C