Question

Victoria Enterprises expects earnings before interest and taxes (EBIT) next year of $ 2 million. Its depreciation and capital expenditures will both be $ 288 comma 000, and it expects its capital expenditures to always equal its depreciation. Its working capital will increase by $ 53 comma 000 over the next year. Its tax rate is 35 %. If its WACC is 10 % and its FCFs are expected to increase at 6 % per year in perpetuity, what is its enterprise value?

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

= $2,000,000(1 – 0.35) + $288,000 - $288,000 - $53,000

= [$2,000,000 x 0.65] + $288,000 - $288,000 - $53,000

= $1,300,000 + $288,000 - $288,000 - $53,000

= $1,247,000

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

= $1,247,000 / (0.10 – 0.06)

= $1,247,000 / 0.06

= $31,175,000

**Hence, the Company’s
Enterprise Value will be $31,175,000**

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