icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 21% of the companys present value, and you believe that at this capital structure the companys debtholders will demand a return of 7% and stockholders will require 14%. The company is forecasting that next years operating cash flow (depreciation plus profit after tax at 40%) will be $59 million and that investment expenditures will be $21 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year.

a.	What is the total value of Icarus? (Do not round intermediate calculations. Enter your answer in millions rounded to the nearest whole dollar amount.)

Total value

$ million

b.	What is the value of the companys equity? (Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place.)

Companys equity

$ million

Explanation:

Some values below may show as rounded for display purposes, though unrounded numbers should be used for the actual calculations.

a.

WACC	= (D / V) (1 Tc)rDebt+ (E / V) rEquity
	= .21 (1 .40)(.07) + (1 .21) .14
	= .1194, or 11.94%

Free cash flow	= $59m 21m
	= $38m

Value	= FCF / (r g)
	= $38m / (.1194 .04)
	= $478,468,900, or $478m
b.