Question

Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 31% of the company’s present value, and you believe that at this capital structure the company’s debt holders will demand a return of 5% and stockholders will require 12%. The company is forecasting that next year’s operating cash flow (depreciation plus profit after tax at 21%) will be $69 million and that investment in plant and net working capital will be $31 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year.

**a.** What is the total value of Icarus?

**b.** What is the value of the company’s
equity?

**(For all the requirements, do not round intermediate
calculations. Enter your answers in millions rounded to 1 decimal
place.)**

Answer #1

Dear Student,

Please see the attached picture for the answer.

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plans to maintain debt at 26% of the company’s present value, and
you believe that at this capital structure the company’s debt
holders will demand a return of 6% and stockholders will require
13%. The company is forecasting that next year’s operating cash
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million and that investment...

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holders will demand a return of 6% and stockholders will require
13%. The company is forecasting that next year’s operating cash
flow (depreciation plus profit after tax at 21%) will be $78
million and that investment...

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proposing to go public, and you have been given the task of
estimating the value of its equity. Management plans to maintain
debt at 27% of the company’s present value, and you believe that at
this capital structure the company’s debt holders will demand a
return of 5% and stockholders will require 12%. The company is
forecasting that next year’s operating cash flow (depreciation plus
profit after tax at 40%) will be $65 million and that investment...

Icarus Airlines is proposing to go public, and you have been
given the task of estimating the value of its equity. Management
plans to maintain debt at 37% of the company’s present value, and
you believe that at this capital structure the company’s debt
holders will demand a return of 7% and stockholders will require
14%. The company is forecasting that next year’s operating cash
flow (depreciation plus profit after tax at 40%) will be $75
million and that investment...

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given the task of estimating the value of its equity. Management
plans to maintain debt at 37% of the company’s present value, and
you believe that at this capital structure the company’s debt
holders will demand a return of 7% and stockholders will require
14%. The company is forecasting that next year’s operating cash
flow (depreciation plus profit after tax at 40%) will be $75
million and that investment...

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expenditures for 2021 are expected to be $2 million. No change is
expected in the company’s net operating working capital. The
company’s free cash flow is expected to grow at a constant rate of
5 percent. The company’s cost of equity...

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