Question

You need to estimate the value of Laputa Aviation. You have the following forecasts (in millions of dollars) of its profits and of its future investments in new plant and working capital:

	Year
		1			2			3			4
Earnings before interest, taxes, depreciation, and amortization (EBITDA)	$	84		$	104		$	119		$	124
Depreciation		14			24			29			34
Pretax profit		70			80			90			90
Tax at 40%		28			32			36			36
Investment		13			16			19			21

From year 5 onward, EBITDA, depreciation, and investment are expected to remain unchanged at year-4 levels. Laputa is financed 40% by equity and 60% by debt. Its cost of equity is 15%, its debt yields 6%, and it pays corporate tax at 40%.

a. Estimate the company’s total value. (Do not round intermediate calculations. Enter your answer in millions rounded to the nearest whole amount.)

b. What is the value of Laputa’s equity? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Answer 1

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