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Victoria Enterprises expects earnings before interest and taxes ​(EBIT​) next year of $ 1 million. Its...

Victoria Enterprises expects earnings before interest and taxes ​(EBIT​) next year of $ 1 million. Its depreciation and capital expenditures will both be $ 303,000​, and it expects its capital expenditures to always equal its depreciation. Its working capital will increase by $ 53,000 over the next year. Its tax rate is 40 %. If its WACC is 10 % and its FCFs are expected to increase at 3 % per year in​ perpetuity, what is its enterprise​ value?

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Answer #1

Enterprise Value

The Value of an Enterprise is calculated by using the following formula

Enterprise Value = Free Cash Flow / (WACC – g)

Free Cash Flow (FCF)

Free Cash Flow (FCF) = EBIT(1 – Tax Rate) + Depreciation Expenses – Capital Expenditures – Changes in Net Working Capital

= $1,000,000(1 – 0.40) + $303,000 - $303,000 - $53,000

= [$1,000,000 x 0.60] + $303,000 - $303,000 - $53,000

= $600,000 + $303,000 - $303,000 - $53,000

= $547,000

Therefore, the Enterprise Value = Free Cash Flow / (WACC – g)

= $547,000 / (0.10 – 0.03)

= $547,000 / 0.07

= $7,814,285.71

Hence, the Company’s Enterprise Value will be $7,814,285.71

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