Question

Next year, Soggy Otter is expected to earn an EBIT of $11,000,000, and to pay a...

Next year, Soggy Otter is expected to earn an EBIT of $11,000,000, and to pay a federal-plus-state tax rate of 30%. It also expects to make $2,750,000 in new capital expenditures to support this level of business activity, as well as $15,000 in additional net operating working capital (NOWC).

Given these expectations, it is reasonable to conclude that next year Soggy Otter will generate an annual free cash flow (FCF) of ______________(rounded to the nearest whole dollar).

Next, based on your estimate of Soggy Otter's next year's FCF and making the stated assumptions, complete the following table:

• Soggy Otter can sustain this annual FCF forever,
• the company has a weighted average cost of capital of 13.86%,
• the company does not currently own any marketable securities,
• there are 22,500 shares of Soggy Otter outstanding
• the company's value of debt is 45% of its total entity value, and
• the company's value of preferred shares is 25% of its total entity value.

Attributes of Soggy Otter

Value
Total Entity Value   
Value of Common Equity   
Intrinsic value (per share)   
Business   Finance   
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Homework Answers

Answer #1

1. Free Cash flow = EBIT * (1 - Tax) - Capital spending - Addition to working capital

Free Cash flow = 11000000* (1 - 30%) - 2750000 - 15000

Free Cash flow = $4935000

2. Total entity value = Free cash flow / cost of capital

Total entity value = 4935000 / 13.86%

Total entity value = $35606060.61

3. Value of common equity = Entity value * (1 - Weight of debt - weight of preferred stock)

Value of common equity = 35606060.61 * (1 - 45% - 25%)

Value of common equity = $10681818.18

4. Intrinsic value per share = Value of Common equity / Shares O/s

Intrinsic value per share = 10681818.18 / 22500

Intrinsic value per share = $474.75

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