Calculate the Terminal Value and Enterprise Value? Given Discount rate= 8% and g

Question

Calculate the Terminal Value and Enterprise Value?

Given Discount rate= 8% and growth rate= 4.5%

Assuming the data is in '000, then pre-tax cost synergies equal 2,000 in first year and 4,000 in subsequent years. Also, as can be observed by dividing tax from taxable income, tax rate is 40% appx.

Therefore, After-Tax synergies need to be reduced by tax out flow resulting in tax synergy of 1200 in first year and 2400 in next years. The resultant cash flows will then be:

6566.9.

Net Income $5,575 $7,447 $8,034 $8,892 $9,906 $11,076 Depreciation $1,508 $1,660 $1,828 $2,012 $2,212 $2,432 Incremnetal PPE ($18,268) ($3,788) ($2,368) ($2,664) ($2,961) ($3,257) Incremental Working Capital ($16,840) ($3,491) ($2,184) ($2,456) ($2,729) ($3,002) Tax Synergies 1200 2400 2400 2400 2400 Free Cash Flow ($28,025) $3,028 $7,710 $8,184 $8,828 $9,649 Discounted Value ($28,025) 2803.70 6610.08 6496.72 6488.84

6566.9.

Explanation / Answer

The formula of terminal value= FCF in last year(1+Terminal growth rate)/ Cost of capital-terminal grpwth rate

Terminal value= {9649*(1+0.045)}/0.08-0.045=9649*1.045/0.035=$288,091,571

Enterprise Value= Present value of all freecash flows+Present value of terminal cash flow=2803.70+6610.08+6496.72+6488.84+6566.9+68% of 288091.57=$225,035,111.137

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