Question

1.Delta Corp.'s free cash flows last year was $200 million and analysts expect the firm's cash flows to decrease by 10% for the next two years before returning to a constant 5% growth rate. The market value of the company's debt and preferred stock is $50 million and $4 million, respectively. The company also has $3 million invested in treasury bills. Delta has 15 million common shares outstanding and investors require a 30% rate of return. Find Delta's value of operations (in millions). Round intermediate steps and your final answer to four decimals. Do not use the dollar symbol or words when entering your response.

2. Find the intrinsic value of the firm's equity (in millions). Round intermediate steps to four decimals.

		570.9231
		582.9231
		585.9231
		589.9231

Answer 1

Value from operations:PV of Cash flows from operations

P2 = FCF3 / (Req ret - g)

= FCF2 * (1+g) / (Req ret - g)

= ( $ 162 M * 1.05 ) /( 30% -5%)

= $ 170.1 M / 25%

=$ 680.40 M

Part 2:

Value of Firm Equity = Valu of Operations - Prefered stock Value - Debt + Value of treasury bills

= 636.9231 M - $ 4M - $ 50 M + $ 3M

= 585.9231 M

Option C is correct.