Question

In early 2018, Vacation Experts Inc. was interested in acquiring Beach Homes, Inc., a privately-held, real estate company. Beach Homes has 85 million shares currently outstanding. As a first step in deciding what price to bid for Beach Homes, Vacation Experts’ finance department has prepared a two-year financial projection for the company assuming an acquisition. Use this projection and Beach Homes' 2017 actual financial figures to answer the questions below.

	Beach Homes Inc.
	2-year Financial Projection
	($ millions)
		2017	2018	2019
	Income statement
	Net sales	320	395	410
	Cost of sales	120	130	145
	Gross income	200	265	265
	Depreciation	50	55	58
	Interest expense	15	17	22
	Operating expenses	25	24	28
	Net income before tax	110	169	157
	Provision for taxes	33	51	47
	Net income after tax	77	118	110
	Balance sheet
	Cash and securities	45	60	62
	Accounts receivable	25	51	42
	Inventory	47	74	50
	Other current assets	18	15	17
	Total current assets	135	200	171
	Gross property and equipment	511	612	692
	Accumulated depreciation	102	157	215
	Net property and equipment	613	769	907
	Goodwill	112	112	112
	Total assets	860	1081	1190
	Accounts payable	50	93	89
	Short-term debt	62	75	79
	Current portion long-term debt	12	20	22
	Accrued expenses	18	20	21
	Total current liabilities	142	208	211
	Long-term debt	358	400	390
	Deferred taxes	60	55	61
	Shareholders' equity	300	418	528
	Total liabilities and equity	860	1081	1190

7a. Estimate the present value of Beach Homes Inc.’s free cash flow for the years 2018 - 2019. Vacation Expert's WACC is 8 percent. Beach Homes' WACC is 10.5 percent, and the average of the two companies' WACCs, weighted by sales, is 9 percent. Please show work

EBIT
Tax rate
EBIT(1-tax rate)
Depreciation
Capital expenditures
Working capital
Change in working capital
Free cash flow

Answer 1

	2017(Y-0)	2018(Y-1)	2019(Y-2)
INCOME BEFORE TAX	110	169	157
ADD:INTEREST	15	17	22
EBIT	125	186	179
LESS:TAX	33	51	47
ADD:DEPRICIATION	50	55	58
EBIT(1-TAX RATE)+DEPRCIATION(A)	142	190	190
LESS:CAPITAL EXPENDITURES(B)	-	101(612-511)	80(692-612)
WORKING CAPITAL (WORKING NOTE)	(7)	(8)	(40)
LESS:CHANGES IN WORKING CAPITAL(C)	-	(1)	(32)
FREE CASH FLOW(A-B-C)		90	142
WACC @ 10.5% P.V FACTOR		.905	.819
PRESENT VALUE		81.45	116.30

WORKING NOTE:

CHANGES WORKING CAPITAL	2017	2018	2019
TOTAL OF CURRENT ASSETS	135	200	171
TOTAL OF CURRENT LIABILITIES	142	208	211
WORKING CAPITAL(CURRENT ASSETS- CURRENT LIABILITIES)	(7)	(8)	(40)
CHANGES IN WORKING CAPTIAL	-	(1)	(32)