9. The ABC Co. earned $10 million before interest and taxes on revenue of $60 mi
ID: 2723270 • Letter: 9
Question
9. The ABC Co. earned $10 million before interest and taxes on revenue of $60 million last year. Investment in fixed capital was $12 million, and depreciation was $8 million. Working capital investment was $3 million. The company expects sales, EBIT, investment in fixed and working capital, depreciation to grow at 12% per year for the next five years. After that, the growth will decline to a stable 4% per year, and investments in fixed assets will offset depreciation. The company’s WACC is 8%. What is a fair value of the company? [Cash flows, terminal value in Year 6, final value calculation]
Explanation / Answer
The table for the present value for 6 years is as shown below:
The PV of a growing prepretuity at year 6 is = CF in year 7/(r-g) =
CF in year 7 = EBIT in year 6 * 1.04 = 17,623,416.83 *1.04 = 18,328,353.50 . (We have no depreciation since it is offset bu fixed assets)
PV = 18,328,353.50/(0.08-0.04) = 458,208,837.60
Total value of the company = 109,729,397.28 + 458,208,837.60 = $567,938.234.80
Year 1 2 3 4 5 6 Revenues 60000000 67200000 75264000 84295680 94411162 105740501 EBIT 10000000 11200000 12544000 14049280 15735194 17623416.83 Add back depreciation 8000000 8960000 10035200 11239424 12588155 14098733.47 Cash flow 18000000 20160000 22579200 25288704 28323348 31722150.3 WACC at 8% 0.925925926 0.857339 0.793832 0.73503 0.680583 0.630169627 PV 16666666.67 17283951 17924097 18587952 19276395 19990335.62 NPV 109,729,397.28Related Questions
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