The MoMI Corporations income betore interest, depreciation and taxes was S2.2 mi

Question

The MoMI Corporations income betore interest, depreciation and taxes was S2.2 million in the year ust ended, and rt expects that this will grow by 5% per year forever. To make this happen, the tim w?have to invest an amount equal to 16% of pretax cash flow each year The tax rate is 30%. Depreciation was $280 0001n the year ust ended and is expected to grow at the same rate as the operating cash flow. The approprate market capitalization rate for the unleveraged cash flow#5 109 per year, and the firm currently has debt of $6 million outstanding Use the free cash flow approach to calculate the value of the firm and the firm's equity Enter your answer in dollars not in millions Value of the firm Value of the firm's equity

Explanation / Answer

SOLUTION

Value of firm -

V0 = C1 / (k - g)

= $1,425,600 / (10% - 5%)

= $28,512,000

Value of equity = Value of firm - Value of debt

= $28,512,000 - $6,000,000

= $22,512,000

Amount ($) Before-tax and interest cash flow from operations ($2,200,000*105%) 2,310,000 Depreciation ($280,000*105%) 294,000 Taxable Income 2,106,000 Taxes (@ 30%) 604,800 After-tax unleveraged income 1,501,200 After-tax cash flow from operations (After-tax unleveraged income + depreciation) 1,795,200 New investment (16% of cash flow from operations) 369,600 Free cash flow (After-tax cash flow from operations – new investment) 1,425,600

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