You are an Investment Banker with the firm of Emerson, Lake and Palmer, LLC and you're working on a leveraged acquisition being considered by your client, Allison Chains, Inc. You've received financial information and projections from the target company and you begin the preparation of you DCF valuation model. You know that your Managing Director at Emerson, Lake and Palmer, LLC will want to present two general forms of analysis to the Allison Chains, Inc. board of directors.

 

• The first will be a valuation of the entire business enterprise based on a projection of Free Cash Flow.
• The second will be an IRR analysis of the specific investment returns in the form of Net Cash Flow that Allison Chains, Inc. will earn on the equity portion of their purchase of the target company.

 

	Year 1
Earnings before Interest, Taxes, Depr. and Amort.	$ 20,000
Amortization Expense	$           0
Depreciation Expense	$   3,700
Earnings Before Interest and Taxes	$ 16,300
Interest Expense	$   2,500
Income Before taxes	$ 13,800
Provision for Taxes	$   3,450
Net income	$ 10,425
Other data
Dividends Paid	$           0
Required Addition of New Working Capital	$   1,000
Capital Expenditures	$   4.000
Debt Principal Payments	$   1,000

 

Based on the information set out above, complete the following:

1. Make separate calculations of the Year 1 values of FCF and NCF that you'll use in your valuation and IRR modeling, respectively?
2. Only regarding your FCF calculation for Year 1, assume a WACC rate of 14% and calculate the present value of the FCF that you've determined. In so doing, you recall that your Managing Director is a fan of a mid-year periodicity assumption?