Question

Widget Inc. expects earnings before interest and taxes (EBIT) next year of $2 million. It depreciation and capital expenditures will both be $500,000, and it expects both to stay equal for the next few years. Their working capital will increase by $100,000 over the next year. Its tax rate is 35%. If its WACC is 10% and its FCFs are expected to increase at 4% 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) + $500,000 - $500,000 - $100,000

= $1,300,000 + $500,000 - $500,000 - $100,000

= $1,200,000

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

= $1,200,000 / (0.10 – 0.04)

= $1,200,000 / 0.06

= $20,000,000

“Hence, the Enterprise Value will be $20,000,000”