The MoMi Corporation’s income before interest, depreciation and taxes, was $1.6

Question

The MoMi Corporation’s income before interest, depreciation and taxes, was $1.6 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 16% of pretax cash flow each year. The tax rate is 35%. Depreciation was $220,000 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 $2 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.)

A. What is the value of the firm?

Value of the firm                  $

B. What is the value of the firms equity?

Value of the firms equity        $

Explanation / Answer

MIMos Projected Free Cash Flow For The Coming Years Income before interest, depreciation and taxes + 5% growth 1680000 Depreciation 231000 Taxable income 1449000 Taxes (35%) 507150 After tax Unlveraged Income 941850 After Tax Cash flow from Operation (After tax unlevraged income +Depreciation 1172850 New Investment 16% of pretax cash flow 187656 Free Cash flow 985194 Value Of Firm = Free Cash Flow/(k-g) =985194/(.12-.05) 14074200 Value Of Firm =Value of debt +Value Of Equity Value of Debt       2000000 Value of Equity =14074200-2000000 12074200

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