Question 1 (of 6) Save & Exit The MoMi Corporation\'s cash flow from operations

Question

Question 1 (of 6) Save & Exit The MoMi Corporation's cash flow from operations before interest and taxes was $2.8 million in the year just ended, and it expects that this will grow by 5% peryear forever. To make this happen, the firm will have to invest an amount equal to 16% of pretax cas! flow each year. The tax rate is 35%. Depreciation was $240,000 in the year just ended and is expected to grow at the same rate as the operating cash flow. The appropriate discount atefor the u leveraged cash flow is 13% per year, and the firm currenty has debt of $4.4 million outstanding. Use the free cash flow approach to value the firm's equity. (Do not round intermediate calculations. Omit the "$ sign in your response.) Value of the equity

Explanation / Answer

First we need to calculate Free cash flow for the coming year

so,Before tacx cash flow from operation =+1.05*2800000 = $3024000

(-) Deprication=1.05*240000= $252,000

Taxable income= $2772000

(-)tax at 35% =$970200

After tax unleveraged income= $1801800

After tax cash flow from operations =After tax unleveraged income+ Depriciation

=$1801800+ $252000

=$2053800

New investment = 16% of cash flow from opertion =(0.16*3024000) =$483840

Free cash flow=After tax cash flow from operation minus new investment =$1569960

Valueof the firm =$1569960/(.13-.05) = $19624500

- value of debt 4400000

= value of equity = $ 15224500

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