You are trying to value a private company. The company has 5 milion of debt and

Question

You are trying to value a private company. The company has 5 milion of debt and 4 milion of book equity The ratio of market value to book valkue for samlar firms is 2. You decide to use this ratio to estimate the market thesame industry s2 and the average debt-to-equity ra otor public fim Sinths ndustry premium is 55%, The interest rate for debt is 10% value of equity as the input for the weights in WACC calculation. The average beta for publicly traded fems in 4 The corpo ate tax rate is 40% The siteeratenes ad trek era Here is the FCFF model for valuing the business Year EBIT (EBIT grows at 15% for the first S2.30 $2.65 $3.04 S3.50 $4.02 $4.22 five years and 5% thereafter ) EBIT (1-Tax Rate) Less (Cap. Expenditures-Depreciation) grows $ 115 132 $ 152 .175 $201 s0 00 $1.38 $1.59 $1.82 $2.10 $241 $2.53 at same 15% annual rate as revenue for 5 years and are offisetting thereafter) Equals FCF Assuming after 5 years, the growth rate is 5% forever

Explanation / Answer

Book value weights = Equity = 4 Debt = 5 Market value - Equity = (4 x 2) 8 Debt = 5 D:E (5/8) 0.625 Beta U = Beta L/ (1+ (1-t)D/E) Beta L = 2 D/E = 0.4 (1-t) = (1-0.4)= 0.6 Bu = 2/(1+ 0.4 x 0.6) 1.612903 Now beta for our firm = BL = Bu x (1+ (1-t)D/E) BL = 1.6129 x (1+ (1-0.4) x 5/8) BL = 2.217742 Cost of equity = Rf + (rm- Rf) x Beta 6 + 5.5 x 2.2177 = 18.19758 Cost of debt = 10 x (1- t) = 6 WACC= Weight cost w x cost Debt 5 6 30 Equity 8 18.19758 145.5806 13 175.5806 WACC = 175.58/13 = 13.5062 5) Terminal value as per constant growth model = FCFF6/(WACC- g) FCFF6= 2.53 g= 5% 0.05 Terminal value = (2.53/(.181976-0.05) 19.17018 6) Value of equity = Value of firm - value of Debt Value of firm - Year Post tax EBIT Capital spending FCFF = Post tax EBIT- Capital spending) PV factor PV of FCFF 1 1.38 0.115 1.265 0.846041 1.070242 2 1.59 0.132 1.458 0.715785 1.043436 3 1.82 0.152 1.668 0.605584 1.010061 4 2.1 0.175 1.925 0.512349 0.986322 5 2.41 0.201 2.209 0.433468 0.957472 5 19.17018 0 19.170 0.433468 8.30966 13.37719 Value of firm = 13.37719 Value of debt = 5 Value of equity = 8.377193 Please provide feedback…. Thanks in advance…. :-)

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