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   
0 0
Add a commentTranscribed image text
Next >

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

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Stay Swift Corp. has an expected net operating profit after taxes, EBIT(1 – T), of $14,700...
Stay Swift Corp. has an expected net operating profit after taxes, EBIT(1 – T), of $14,700 million in the coming year. In addition, the firm is expected to have net capital expenditures of $2,205 million, and net working capital (NWC) is expected to increase by $45 million. How much free cash flow (FCF) is Stay Swift Corp. expected to generate over the next year? $248,416 million $16,860 million $12,450 million $12,540 million Stay Swift Corp.’s FCFs are expected to grow...
Ward Corp. is expected to have an EBIT of $2,200,000 next year. Depreciation, the increase in...
Ward Corp. is expected to have an EBIT of $2,200,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $171,000, $97,000, and $121,000, respectively. All are expected to grow at 20 percent per year for four years. The company currently has $16,000,000 in debt and 810,000 shares outstanding. At Year 5, you believe that the company's sales will be $16,500,000 and the appropriate price?sales ratio is 2.6. The company’s WACC is 8.6 percent...
The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach...
The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Tropetech Inc. has an expected net...
Pearl Corp. is expected to have an EBIT of $3,400,000 next year. Depreciation, the increase in...
Pearl Corp. is expected to have an EBIT of $3,400,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $155,000, and $195,000, respectively. All are expected to grow at 18 percent per year for four years. The company currently has $17,500,000 in debt and 1,350,000 shares outstanding. At Year 5, you believe that the company's sales will be $27,030,000 and the appropriate price-sales ratio is 2.6. The company’s WACC is 9.1 percent...
Ward Corp. is expected to have an EBIT of $2,100,000 next year. Depreciation, the increase in...
Ward Corp. is expected to have an EBIT of $2,100,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $169,000, $93,000, and $119,000, respectively. All are expected to grow at 18 percent per year for four years. The company currently has $15,000,000 in debt and 840,000 shares outstanding. At Year 5, you believe that the company's sales will be $16,300,000 and the appropriate price–sales ratio is 2.4. The company’s WACC is 8.4 percent...
URGENT!!! 30 MINUTES LEFT!!! Pearl Corp. is expected to have an EBIT of $2,400,000 next year....
URGENT!!! 30 MINUTES LEFT!!! Pearl Corp. is expected to have an EBIT of $2,400,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $160,000, $105,000, and $145,000, respectively. All are expected to grow at 20 percent per year for four years. The company currently has $12,500,000 in debt and 1,050,000 shares outstanding. At Year 5, you believe that the company's sales will be $20,400,000 and the appropriate price-sales ratio is 2.6. The company’s...
Ward Corp. is expected to have an EBIT of $2,200,000 next year. Depreciation, the increase in...
Ward Corp. is expected to have an EBIT of $2,200,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $171,000, $97,000, and $121,000, respectively. All are expected to grow at 20 percent per year for four years. The company currently has $16,000,000 in debt and 810,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.5 percent indefinitely. The company’s WACC is 8.6 percent and the...
Ward Corp. is expected to have an EBIT of $2,350,000 next year. Depreciation, the increase in...
Ward Corp. is expected to have an EBIT of $2,350,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $174,000, $103,000, and $124,000, respectively. All are expected to grow at 17 percent per year for four years. The company currently has $17,500,000 in debt and 840,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.5 percent indefinitely. The company’s WACC is 8.9 percent and the...
River Walk Tours is expected to have an EBIT of $184,000 next year. Depreciation, the increase...
River Walk Tours is expected to have an EBIT of $184,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $11,000, $1,500, and $13,000, respectively. All are expected to grow at 6 percent per year for three years. After Year 4, the adjusted cash flow from assets is expected to grow at 2.5 percent indefinitely. The company's WACC is 9.2 percent and the tax rate is 21 percent. What is the terminal value...
St. Blues Technologies' expected (next year) EBIT is $405.00, its tax rate is 34%, depreciation is...
St. Blues Technologies' expected (next year) EBIT is $405.00, its tax rate is 34%, depreciation is $87.00, planned capital expenditures are $71.00, and planned INCREASES in net working capital is $15.00. What is the free cash flow to the firm (FCFF)? $ The firm's interest expense is $15.00. Assume the tax rate is 34% and the net debt of the firm INCREASES by $5.00. What is the free cash flow to equity (FCFE)? $ What is the market value of...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT