Question

se information to Firm X below for the problem.

      Figures in millions

      _________________________________________________________________________________________

                                         Year 0 1 2 3

      _________________________________________________________________________________________

      EBIT* $200                $220                $240
Depreciation 25 27 30
Net capital expenditures 50 55 60
Total net working capital (NWC) $10 13 17 22
     Current value of total debt $400
Tax rate = 25%
Number of shares outstanding = 20      __________________________________________________________________________________________

      *EBIT = Earnings before interest and taxes = Revenues – Total costs – Depreciation

Firm X has no preferred stock. The firm’s required rate of return (or weighted average cost of capital) is 15 percent.
a) Find the free cash flow to the firm for Firm X for each year from year 1 to year 3.
b) Firm Y is a comparable firm to Firm X. You estimate Firm Y's EBIT multiple (defined as value of Firm Y / Firm Y's EBIT) in year 3 to be 10. Find the stock price per share of Firm X using free cash flows from year 1 to year 3 from (a) and the terminal value (or continuing value) calculated from the comparable-multiple approach.

Answer 1

Year	0	1	2	3
EBIT		200	220	240
Less : Tax @25%		50	55	60
NOPAT		150	165	180
Add : Depreciation		25	27	30
Less : Capex		50	55	60
Less : Net working capital		13	17	22
FCFF		112	120	128
Terminal value (Year 3 EBIT * 10)				2400
Total Cash flow		112	120	2528
Present value calculation		=112/(1+15%)^1	=120/(1+15%)^2	=2528/(1+15%)^3
Present value		97.39	90.74	1,662.20
Total present value	1,850.33
Equity value = Total value - Debt - Preferred stock
Equity value = 1850.33 - 400
Equity value = 1450.33
Value per share = 1450.33 / 20
Value per share = 72.52

Note : There are four values in NWC row, I have assumed last three are correct.