Caballos, Inc., has a debt to capital ratio of 29%, a beta of 1.9 and a pre-tax
ID: 2734905 • Letter: C
Question
Caballos, Inc., has a debt to capital ratio of 29%, a beta of 1.9 and a pre-tax cost of debt of 7.2%. The firm had earnings before interest and taxes of $ 600 million for the last fiscal year, after depreciation charges of $ 292 million. The firm had capital expenditures of $ 371 million, and non-cash working capital increased by $ 50 million. The firm also had a book value of capital of $ 1.95 billion at the beginning of the last fiscal year. (The treasury bond rate is 4.92 %, the market risk premium is 6.3 % and the firm has a tax rate of 40 %). Assume that the firm is in stable growth, and that the return on capital and reinvestment rates for the last fiscal year can be sustained forever. Estimate the Value of the Firm.
Explanation / Answer
To calculate the value of the firm we need to calculate the OCFC
EBIT -600
CAPITAL EXPENDITURE - 371
NON CASH WORKING CAPITAL - 50
DEPRICIATION -292
TAX RATE -40%
OCFC=OFCF = EBIT(1-T) + depreciation - CAPEX - D working capital - D any other assets
600(1-.4)+292-371-50-0
=231
Assuming that firm growth is stable we will take growth rate as 1
Growth rate= 1
Given no information about equity
WACC or discount rate = d/v*rd(1-tc)
=(.29*1.95/1.95)*7.2(.60)
=.29*4.32
=1.25
Value of the firm = ocfc/k-g
=231/1.25-1
=924 million