Question

Consider a firm with the following parameters: Physical Lifespan 4 years Capital Expense, Year 0 $8,000...

Consider a firm with the following parameters: Physical Lifespan 4 years Capital Expense, Year 0 $8,000 EBITDA / Year $9,000 Overall Firm Cost of Capital 5.1% Tax Rate 25% Loan $13,000 Interest Payments $558 Depreciation Project Life 6 years What is the total PV of this firm, including the loan? Note: Report answer to 4 decimal places, no rounding.

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Answer #1

The value of firm can bebe measured as the sum of the PV of the all free cash flows over the life the firm

Calculation of the Free cash flows from the firm:-

Particulars amount(in $)
EBITDA 9000
Less- Depreciation(8000/6) 1333.33333
Earnings before interest 7666.6667
Less- interest 558
EBT 7108.6667
Less- tax @25% 1777.16668
Earnings after tax 5331.50002
Add: depreciation 1333.33333
Free operating cash flows 6664.83335

Calculation of the PV of the firm

PV of the firm = 6664.83335× PVAF(4 years,5.1%)

= 6664.83335 × [1-(1+I)-n​)]/i

= 6664.83335 × [1-(1+0.051)-4] /0.051

=6664.83335 ×3.5377

PV of the firm= 23,578.1809

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