QUESTION 15 Use the following information on Company Y for ultimately estimating
ID: 2804296 • Letter: Q
Question
QUESTION 15
Use the following information on Company Y for ultimately estimating the net present value of the expansionary investment and answers questions (15)-(20).
Consider the following forecasts for 2017-2021 of the Future Cash Flows, EBITDA and Future Interest Tax Shield for Company Y if the expansion were not to occur. Assume that the EBITDA Multiple for the industry Company Y belongs to is 9.95.
Assume a discount factor of 9% for the Free Cash Flows and for the Continuation Value, and a discount factor of 5% for the Interest Tax Shield. *Hint: You have sufficient information to calculate the Interest Tax Shield
Firm Value
2017
2018
2019
2020
2021
Free Cash Flow of Firm
26,820,769
30,500,332
32,639,864
34,929,163
37,378,712
EBITDA
61,229,798
. What is the Present Value (at December 2016) of the Free Cash Flows forecast for Corporation Y if the firm where not to do the expansion?
Use the following information on Company Y for ultimately estimating the net present value of the expansionary investment and answers questions (15)-(20).
Consider the following forecasts for 2017-2021 of the Future Cash Flows, EBITDA and Future Interest Tax Shield for Company Y if the expansion were not to occur. Assume that the EBITDA Multiple for the industry Company Y belongs to is 9.95.
Assume a discount factor of 9% for the Free Cash Flows and for the Continuation Value, and a discount factor of 5% for the Interest Tax Shield. *Hint: You have sufficient information to calculate the Interest Tax Shield
Explanation / Answer
Continuation Value at the end of 2021, TV5 = EBITDA x Multiple = 61,229,798 x 9.95 = $609,236,490
Present Value = FCF1 / (1 + r) + FCF2 / (1 + r)^2 + FCF3 / (1 + r)^3 + FCF4 / (1 + r)^4 + (FCF5 + TV5) / (1 + r)^5
= 26,820,769 / 1.09 + 30,500,332 / 1.09^2 + 32,639,864 / 1.09^3 + 34,929,163 / 1.09^4 + (37,378,712 + 61,229,798) / 1.09^5
= $520,481,907
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