Question

You have been asked to estimate the value of General Communications, a telecomm firm. General Communications has a debt to capital ratio of 30%, a beta of 1.10 and a pre-tax cost of debt of 7.5%. The firm had earnings before interest and taxes of $ 600 million in 2020 (fiscal year end is March 31, 2020), after depreciation charges of $300 million. The firm had capital expenditures of $360 million, and non-cash working capital increased by $50 million during 2016. The firm also had a book value of capital of $ 2 billion at the beginning of 2019 fiscal year.

(The Treasury bond rate is 5%, the market risk premium is 6.3% and the firm has a tax rate of 40%). Assuming that the firm is in stable growth, and that the return on capital and reinvestment rates from 2019 can be sustained forever.

Answer 1

D/V	0.3		Treasury bond Rf	5%
beta	1.1		Market risk premium	6.30%
Cost of debt (Rd)	7.50%		Tax rate	40%
Book value	$2 billion

growth rate (g) = (Net capex - depreciation + change in WC)/EBIT(1-t) * ROC

ROC = EBIT(1-t)/Book value

therefore g= (Net capex - depreciation + Change in WC )/ Book value = (360-300+50)/ 2000 = 0.055

Re=Rf + Beta*Market risk premium = 0.05+1.1*0.063 = 0.1193

WACC = Re*E/V + Rd*(1-t)*D/V = 0.1193*0.7 + 0.075*(1-0.4)*0.3 = 0.09701

Cash flow inn FY 2020:-

year	2020
EBIT*(1-t)	360
Deprciation	300
FCFF	660

Value of firm = FCFF * (1+g)/(WACC-g) = 660*(1+0.055)/(0.097-0.055)

Value of firm = $16.578 billion