Icarus Airlines is proposing to go public, and you have been given the task of e
ID: 2719397 • Letter: I
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 30% of the company’s present value, and you believe that at this capital structure the company’s debtholders will demand a return of 6% and stockholders will require 11%. The company is forecasting that next year’s operating cash flow (depreciation plus profit after tax at 40%) will be $68 million and that investment expenditures will be $30 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.)
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 30% of the company’s present value, and you believe that at this capital structure the company’s debtholders will demand a return of 6% and stockholders will require 11%. The company is forecasting that next year’s operating cash flow (depreciation plus profit after tax at 40%) will be $68 million and that investment expenditures will be $30 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year.
Explanation / Answer
Calculation Of Value of the Business :- A) Value of The Business can be calculated by capitalizing the organization free cash flow with growth rate. i.e., Company Value = Free Cash Flows(Cash Flow from operating activities-Capital expenditure)/Perpetual Growth = (68-30)/4% A) TOTAL VALUE = 950 Millions B)It was given that 30% of organization structure is debt therefore remaining 70% equals to Equity fund. b)Value of company equity is 70% of Total Value = +950*70% 665 millions
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