You have been asked to value Revox Inc., a cement company. The company reported

Question

You have been asked to value Revox Inc., a cement company. The company reported $ 5 million in after-tax operating income on revenues of $ 100 million in the most recent year. It expects revenues to grow 20% next year as the economy comes out of the recession and the after-tax operating margin to improve to 10%. The firm expects capital expenditures of $ 10 million and depreciation of $ 4 million next year; there are no working capital requirements. After next year, the expected growth in operating income is 4% forever and the firm expects to maintain a return on invested capital of 12% in perpetuity. If the cost of capital is 10%, estimate the value of Revox Inc. today.

Thank you very much!

Explanation / Answer

$ million Value of firm calculation Years 0 1 2 3 4 5 6 Revenue Growth 20% Revenue 100 120 144 173 207 249 299 =5.5*(1+.04)/(12%-10%) Tax Rate Assumed 40% Operating cost 91.67 110.83 134.47 162.89 197.05 238.11 287.45 286.00 Operating Profit Growth 10% Operating Profit 8.33 9.17 9.53 9.91 10.31 10.72 11.15 Operating Profit Growth from y2 4% Tax 3.33 3.67 3.81 3.97 4.12 4.29 4.46 Post Tax Profit 5.00 5.50 5.72 5.95 6.19 6.43 6.69 Net Working Cap changes 0 0 0 0 0 0 0

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