Tiger Tech has income before interest, depreciation and taxes of $124.8 million
ID: 2726602 • Letter: T
Question
Tiger Tech has income before interest, depreciation and taxes of $124.8 million in the year just ended, and it expects that this will grow by 4.5% per year forever. To make this happen, the firm will have to invest an amount equal to 18% of pretax cash flow each year. The tax rate is 28%. Depreciation was $12,600,000 in the year just ended and is expected to grow at the same rate as the operating cash flow. The appropriate market capitalization rate for the unleveraged cash flow is 12% per year, and the firm currently has debt of $245 million outstanding. Use the free cash flow approach to calculate the value of the firm and the value of the firm’s equity shares if there are 27.2 million shares outstanding.
Please show your work!
Explanation / Answer
Free cash flow = EBITDA x (1- t) + Depreciation x t – net working capital
= 124.80 million x (1-0.28) +12.60 million x 0.28 - 124.80 x .18
= 93.384 million – 22.464 million
= 70.92 million
Value of firm = Free cash flow x (R- g)
= 70.92 million /(0.12 -0.045)
= 945.60 million
Value of Equity = value of firm – value of debt
= 945.60 million – 245 million
= 700.60 million
Value per share = 700.60 million / 27.20 million
= 25.76 per share