Question 25 (Revision Booklet):

We are now at the beginning of the year 2022. The marginal corporate tax rate of ABC firm is 25%. Risk free rate is 3%, Cost of debt is 3.75%, Cost of Equity 11.58, and WACC 7.01%.

1. ABC firm had operating income before interest and taxes for the year 2021 of $600 million. The firm had depreciation and amortization expense of $40 million that same year. Capital spending totaled $120 million during 2021. At the end of 2020 and 2021, working capital totaled $70 and $90 million, respectively. Estimate the free cash flow of the firm in 2021.
2. The free cash cash flow of ABC firm is expected to grow at 8% every year for the next 3 years (2022-2024) and then it is expected to grow at 4% beyond the third year. Using the WACC after the change of capital structure and assuming it will not change in the future, please use the Perpetuity Growth Method and estimate the firms enterprise value at the beginning of the year 2022 (now).