Question

The XYZ Company has a historical growth in its free cash flows of 4% with little variability. With the addition of a new plant and equipment, however, you expect that free cash flows will grow 7% in year 1, 5% in year 2, and 5% thereafter. The firm’s last free cash flow was $175,000. The firm has a required rate of return of 10%. The book value of operating assets is $1,000,000. The market value of non-operating assets is $900,000. The market value of the firm’s debt is $1,500,000 and the market value of the preferred stock is $500,000.

What is the value of the firm’s operations?

What will be the market value of the firm’s common equity?

Answer 1

value of the firm’s operations: -

CASH FLOWS
year	cash flows	discounting factor	present values
year 1	187250	0.90909	170227.3
year 2	196613	0.82645	162489.7
year 3	4128874	0.75131	3102084.1
	4512737		3434801.1

value of the firm operations = $ 3434801.1

b) Enterprise value = market value of equity + mv of debt + preference equity of market value + market value of non operating assets

3434801.1 = mvt value of equity + 1500000 + 500000 + 900000

market value of equity = 3434801.1 - 2900000 = $ 534801.