Question

12) Jumping Corp. had sales of $430million last year and reported an operating profit margin of 20%. This is net of a $10million depreciation expense. Interest expense was $20million and taxes were paid at a 30% rate. Additionally, during the year, Jumping Corp. made capital expenditures of $35million and increased working capital by $7million. Note that Jumping Inc.’s capital structure consists of 40% debt on its $100million asset base.

A. Using the relevant info. above, what is FCF?

B. Valueline reports Jumping Corp.’s equity beta to be 1.8. Using the relevant info. above what is Jumping Corp.’s asset beta?

C. Calculate the appropriate discount rate assuming a risk-free rate of 2.5% and a market risk premium of 7.5%

D. Using the info. in parts A-C, what is the value of Jumping Corp. if FCF is expected to grow at a rate of 4% into perpetuity?

Answer 1

12

A

EBIT = sales*operating margin= 430*0.2= 86m

FCFF = EBIT*(1-tax rate)+Depreciation- Capex- Chng. In Work. Cap.

FCFF = 86*(1-0.3)+10-35-7

FCFF = 28.2

B

D/E = D/(A-D) = 0.4/(1-0.4) = 0.6666

Levered Beta = Unlevered Beta x (1 + ((1 – Tax Rate) x (Debt/Equity)))

1.8 = Unlevered Beta*(1+((1-0.3)*(0.6666)))

Unlevered Beta = 1.23

C

As per CAPM

expected return = risk-free rate + beta * (Market risk premium)

Expected return% = 2.5 + 1.8 * (7.5)

Expected return% = 16

D

firm or enterprise value= recent FCF* (1 + growth rate )/(WACC - growth rate)

Firm/enterprise value = 28.2 * (1+0.04) / (0.16 - 0.04)

Firm/enterprise value = 244.4