Icarus Airlines is proposing to go public, and you have been given the task of e

Question

Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 23% of the company’s present value, and you believe that at this capital structure the company’s debtholders will demand a return of 5% and stockholders will require 12%. The company is forecasting that next year’s operating cash flow (depreciation plus profit after tax at 40%) will be $61 million and that investment expenditures will be $23 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year.

What is the value of the company’s equity? (Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place.)

Explanation / Answer

post tax kd = 5 X (1 - 0.4) = 3%

WACC = (3% X 23%) + (12% X 77%)

= 9.93%

Net cash flow = 61 - 23 = $38 million

(a) Total value of Icarus = 38

0.0993 - 0.04

= $640.81 million

(b) Company's Equity = 640.81 X 77%

= $ 493.42 million

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