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Ce is a piano manufacturer. The company reported net income of $50 million for the most...

Ce is a piano manufacturer. The company reported net income of $50 million for the most recent fiscal year. Cello has $1 billion in debt and paid $100 million in interest expense in the most recent financial year. The firm reported depreciation expense of $100 million in the current fiscal year, and capital expenditures were 200% of depreciation. The firm has a WACC of 11% and a constant growth rate of 4% in perpetuity. assume the market risk premium is 5.5%, the risk free interest rate is 2% and the corporate tax rate is 0.20.

  1. Estimate the company’s value
  2. Estimate the value of the company’s equity.
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Answer #1

Calculation of free cash flow:

Net Income = $50 million

Earnings before tax = $50 million/(1-0.2) = 62.5 million

EBIT = 162.5 million

EBIT(1-T) = 162.5 million(1-0.2) = 130 million

Add: Depreciation (non-cash expense) = $100 million

Less: Capital Expenditure = $200 million

Free cash flow = $30 million

a.Value of company = Expected Free cash flows/(WACC- growth rate)

= 30 million(1+4%)/(11%-4%)

= $445.7143 million

b.Value of Equity = Value of company – Value of debt

= 445.7143-100

= 345.7143 million

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