Following is a four-year forecast for Torino Marine. Year 2015 2016 2017 2018 Fr
ID: 2748656 • Letter: F
Question
Following is a four-year forecast for Torino Marine. Year 2015 2016 2017 2018 Free CFs in million -76 92 112 150 a. Estimate the fair market value of Torino Marine at the end of 2014. Assume that after 2018, earnings before interest and tax will remain constant at $200 million, depreciation will equal capital expenditures in each year, and working capital will not change. Torino Marine’s weighted-average cost of capital is 15 percent and its tax rate is 34 percent. (2 points) b. Estimate the fair market value per share of Torino Marine’s equity at the end of 2014 if the company has 40 million shares outstanding and the market value of its interest-bearing liabilities on the valuation date equals $230 million. (2 points) c. Now let’s try a different terminal value. Estimate the fair market value of Torino Marine’s equity per share at the end of 2014 under the following assumptions: (2 points) (1) Free cash flows in years 2015 through 2018 remain as stated earlier. (2) EBIT in year 2018 is $200 million, and then grows at 7 percent per year forever. (3) To support the perpetual growth in EBIT, capital expenditures in year 2019 exceed depreciation by $50 million, and this difference grows 7 percent per year forever. (4) Similarly, working capital investments are $15 million in 2019, and this amount grows 7 percent per year forever.
Explanation / Answer
a) After 2018,
EBIT is given as 200
So free cash flow = EBIT * (1-tax) + depreciation - Capex + change in working capital = 200 * (1-34%) + 0 = 132
So perpetuity value of company in 2018 will be 132 / 15% = 880
So all cash flows are as follows
So value of the company is sum of all cash flows = 666.03 million
b) value of debt is given as $230 million
so value of equity = 666.03 - 230 = $436.03 million
Value per share = 436.03 / 40 = $10.90 per share
c)
After 2018,
EBIT is given as 200
So free cash flow = EBIT * (1-tax) + depreciation - Capex + change in working capital = 200 * (1-34%) - 50 + 15= 97
So perpetuity value of company in 2018 will be 97 / (15% - 7%) = $1212.5 million
So all cash flows are as follows
So value of the company is sum of all cash flows = 856.13 million
value of debt is given as $230 million
so value of equity = 856.13 - 230 = $626.13 million
Value per share = 626.13 / 40 = $15.65 per share
Year Cash Flow PV 2015 -76 -66.087 2016 92 69.5652 2017 112 73.6418 2018 150 85.763 Thereafter 880 503.143