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KK company has current sales of $1,000, current expected growth of 5%, and a WACC of...

KK company has current sales of $1,000, current expected growth of 5%, and a WACC of 10%. The company has profitability (OP=6%) but high capital requirements (CR=78%). What is the MVA of KK company based on the current growth of 5%?

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Answer #1

We need to find the free cash flow available with firm.

Then we may capitalise the FCFF to find the firm value.

Free cash flow to the firm (FCFF) represents the amount of cash flow from operations available for distribution after depreciation expenses, taxes, working capital, and investments are accounted for and paid.

Free Cashflow = Operating Cashflow (1- Capital Requirement)

= 6% of sales (1- 0.78)

= 1000*6% * 0.22 = 13.2 million

Value of the firm = FCFF (1+ Growth) / (WACC - Growth)

= 13.2 (1+ 5%)/ (10%-5%) = 13.86 / 5% = 277.2 million

Market Value added shall be difference of Market Value now - Initial Investment

i.e 277.2 - Initial Investment

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