The MoMi Corporation’s income before interest, depreciation and taxes, was $1.9
ID: 2752676 • Letter: T
Question
The MoMi Corporation’s income before interest, depreciation and taxes, was $1.9 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 19% of pretax cash flow each year. The tax rate is 30%. Depreciation was $250,000 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 $5 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.)
The MoMi Corporation’s income before interest, depreciation and taxes, was $1.9 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 19% of pretax cash flow each year. The tax rate is 30%. Depreciation was $250,000 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 $5 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.)
Explanation / Answer
MIMos Projected Free Cash Flow For The Coming Years Income before interest, depreciation and taxes + 5% growth 1900000 Depreciation 250000 Taxable income 1650000 Taxes (30%) 495000 After tax Unlveraged Income 1155000 After Tax Cash flow from Operation (After tax unlevraged income +Depreciation 1405000 New Investment 19% of pretax cash flow 266950 Free Cash flow 1138050 Value Of Firm = Free Cash Flow/(k-g) =1138050/(.12-.05) 16257857.1 Value Of Firm =Value of debt +Value Of Equity Value of Debt 5000000 Value of Equity =14074200-2000000 11257857.1