whats the equity value of the firm? please show the formulas
Font Paragraph Imagine Industries, Inc. Imagine Industries, Inc. is a newly created firm that came into existence through an equity spin- off from Ocean Capital-a private equity firm specializing in technology recapitalizations. Imagine developed a specialization in artificial intelligence (A/T) and robotics capabilities (RC and is headquartered in Lexington, Kentucky Currently, Imagine has hired a technology and A/l related consulting firm Quantifier, Inc. to build unit sales projections for the company. This is expected to give the company insight into quickly evolving markets and changes therein to assist in corporate planning for possible new investments. After diligent research, Quantifier established pro forma projections for Imagine's only product -Mequafinl (due to the special dynamics of A/T and R/C, the firm focuses its efforts and resources on a single product line) which cover the following five years: 177,389 units 231,335 units 259,450 units 221,900 unts 186,850 units ear Year 2 Year 3 Year 4 Year 5 Such estimates established by Quantifier are based on the premise that the current average selling unit prevails in years three through five. To derive an estimate for terminal cash flows to price (ASP) of $567 per unit holds for the first two years and a subsequent reduction to $415 per Imagine, it is assumed that unt sales will decline by an average of 4.35% per year starting in the terminal time per year lasting indefinitely thereafter. Because of expected competitive pressures, the ASP is expected to decline by 6% per year starting in the terminal period with the trend expected to continue indefinitely thereafter The Special Task Force for Internal Corporate Finance Issues has determined through vanious cost accounting and engineering studies that Imagine is able to produce its Mequafir product at a variable cost approximating $67/unit. Due to a tight labor market and resource constraints nationwide, the VC costunt is expected to rise by 2.85% per year for the first 5 years and continuing trend thereafter. Due to growing capacity needs, Imagine's total annual fixed costs indefinitely into the future increase by an average of 3.55% per year starting in the terminal time period with an indefinitely are projected to start at S 15,879,000 annually and grow by an estimated 3.79% per year To maintain market advantage well into the future, necessary capital expenditures for the firm are projected to be an initial $31,667,000 up front for which an IRS ruling requested by the company places such an investment in the five-year MACRS depreciation schedule. The market is expected to dynamically change going forward, but neither Imagine nor Quantifier can ords English (United States) reasonably predict such changes in technology and their inherent future financial impact. As such, both parties agreed to conservative defensive estimates of future needed investments. With reverse cost engineering, depreciation is estimated to be $1.25 Million per year on a straight-line basis in the terminal phase of growth covering an additional 5-year investment strategy. Such an investment is designed to result in a strategic operational change in Imagine to annuitized services related to A/I and R/C capabilities To support the operational capabilities of the Imagine, a working capital investment coming to approximately 13.42% of annual sales is projected for the first 5 years. In the terminal period, such working capital investments are expected to decline to an average 450% of sales. The marginal corporate income tax rate is expected to average 22.45% reflecting recent changes to the marginal corporate income tax rate. Free Cash Flow (FCF) in the terminal phase of the project is expected to grow approximately 4.237% indefinitely. From an historical perspective, the debt-equity ratio has averaged 1.325 for which Imagine's current debt level of $138 900.000 The average maturity of the debt is 5 years with an expected consistent 5-year rollover indefinitely into the future. Based on an S&P credit rating of BB- the interest rate on debt averaging 9.17%. The equity beta has been studied and conservatively calculated to be 1.2365 while the risk-free rate of return is established to be 2.91%. The expected rate of return on the market is 10.23% and Imagine currently has 12,949,090 shares of comrnon stock outstanding. You have been hired by Imagine Industries Inc. to determine the following 1) Op. ach Flow fx ehase 4) 5) 6) Wh TITm is What the equity value of the firm is 0) Years 5 Terminal Value 2 Particulars 3 Free Cash Flow EBIT (PBT+ 4 Depreciation) 5 Less: Tax $72,815,500$98,744,952 72,802,827 $59,432,660 $47,053,647 $39,364,058 $16,347,079.75 $22,168 241.66 $16,344234.64 $13,342,632.10 $10,563 543.76 $8,837230.93 $6,333,4006,333,400 $6,333,400 $6,333,400 S6,333,400 $1,250,000 S4,104827 ($3,153,055) ($2,091,272) ($1,952,040) (5697,837) Add: Less: Change in 8 Less: Capex 10 Free Cash Flow S62,801,820 $78,805,283 $65,945,047 $54,514,700 $44,775,543 $32,474,664 12 Terminal Value 13 14 Total Value 15 Discounting $32,474,664 S62,801,820 $78,805,283 $65,945,047 $54,514,700 $77250,207 $56,708,539.21 $64,865,751.25 $49,869,689.02 $38,12597.03 $50,252,356.50 6S% $56,708,539.21 $64,865,751.25 $49,869,689.02 $38,127 597.03 $50,252,356.50 90% 82% 76% 70% 17 18 PV Enterprise 19 Value 20 21 $259,823,933.01 23|Cost of Capital 11% 25 26
