Rex operates a chain of pharmaceutics around the country. You have been provided
ID: 2453063 • Letter: R
Question
Rex operates a chain of pharmaceutics around the country. You have been provided with the following projections for the firm (in millions of dollars).
1
2
3
After year 3
EBIT
$ 100.00
$ 125.00
$ 156.25
Net Cap Ex
30
37.5
46.5
Total Working
Capital
60
70
82
Cost of Equity
11%
11%
11%
10%
Pre-tax Cost of
borrowing
8.00%
8.00%
8.00%
7%
Debt to Capital
Ratio
25%
25%
25%
25%
The firm has a marginal tax rate of 40%. The firm’s FCF will grow at 5% forever, starting in year 4. The working capital currently is $ 52 million.
Estimate the expected cash flows to the firm for the next 3 years.
Estimate the cost of capital each year for the next 3 years.
Estimate the terminal value at the end of year 3.
Estimate the value of the firm today.
1
2
3
After year 3
EBIT
$ 100.00
$ 125.00
$ 156.25
Net Cap Ex
30
37.5
46.5
Total Working
Capital
60
70
82
Cost of Equity
11%
11%
11%
10%
Pre-tax Cost of
borrowing
8.00%
8.00%
8.00%
7%
Debt to Capital
Ratio
25%
25%
25%
25%
Explanation / Answer
FCF is calculated as:EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital ExpenditureIt can also be calculated by taking operating cash flow and subtracting capital expenditures.
1) Estimate the expected cash flows to the firm for the next 3 years.
2) Estimate the cost of capital each year for the next 3 years are 10 %
3) Estimate the terminal value at the end of year 3
(The terminal value of an asset is its anticipated value on a certain date in the future. It is used in multi-stage discounted cash flow analysis and the study of cash flow projections for a several-year period. The perpetuity growth model is used to identify ongoing free cash flows)
Particulars Yr- 1 Yr -2 Yr- 3 Yr-4 Yr-5 Yr-6 EBIT(1-0.40) 60 75 93.75 Change in Net WC 8 10 12 Net capital expenditure 30 37.5 46.5 FCF 22 27.5 35.25 37.01 38.9 40.8 (5% increses) (5% increses) (5% increses)Related Questions
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