The common stock of Buildwell Conservation & Construction, Inc., has a beta of .

Question

The common stock of Buildwell Conservation & Construction, Inc., has a beta of .90. The Treasury bill rate is 5%, and the market risk premium is estimated at 9%. BCCI’s capital structure is 40% debt, paying a 8% interest rate, and 60% equity. Buildwell pays tax at 40%. You need to estimate the value of Buildwell Conservation. You have the following forecasts (in millions of dollars) of Buildwell’s profits and of its future investments in new plant and working capital:

1 2 3 4

Earnings before interest, taxes, depreciation, and amortization (EBITDA) 165 185 200 205

Depreciation 20 30 35 40

Pretax profit 145 155 165 165

Investment 38 41 44 46

From year 5 onward, EBITDA, depreciation, and investment are expected to remain unchanged at year-4 levels. Estimate the company’s total value and the separate values of its debt and equity. (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)

What si the total value in $ million, debt value in $ million and equity value $ million

Explanation / Answer

As per CAPM, Cost of Equity = Risk -Free Rate+Beta*(Market RiskPremium) Cost of Equity =0.05+0.90*(0.09) 0.131 ie.13.1% After-tax cost of Debt=0.08*(1-0.40)= 0.048 ie. 4.8% Weighted Average Cost of Capital(WACC) =(0.131*0.6)+(0.048*0.4) 0.0978 ie. 9.78% Year 1 2 3 4 5 Initial inv. In W/c -38 -41 -44 -46 -470.3476 EBITDA 165 185 200 205 Interest on Debt 8% on W/c Inv. 3.04 3.28 3.52 3.68 Depreciation 20 30 35 40 Pretax profit 141.96 151.72 161.48 161.32 Tax @ 40% 56.784 60.688 64.592 64.528 After-tax Profit 85.176 91.032 96.888 96.792 Add Back Depn 20 30 35 40 Annual cash flows 105.176 121.032 131.888 136.792 1398.691 Net annual Cash flows 67.176 80.032 87.888 90.792 928.3434 PV F @ 9.78%(WACC) 0.91091 0.82976 0.75584 0.6885 0.6885 Yr.4 dis.c.% PV @ 9.78% 61.19129 66.40735232 66.42927 62.51029 639.16443 Net Present Value=Sum of PVs = 895.70263 Total Value of Firm= NPV of these cashflows discounted @ the firm's WACC 9.78%= 895.7 Millions Value of Equity 60% 895.7*60%= 537.4 Value of Debt 40% 895.7*40%= 358.3 Total 895.7 Working Notes: As from year 5 onward, EBITDA, depreciation, and investment are expected to remain unchanged at year-4 levels We calculate theTerminal PV of Year 5-onwards cash flows at the reqd.rate of return ie. WACC 9.78% = 136.792/9.78%= 1398.691 PV of Inv. In Working Capital = 46/9.78%= 470.3476

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