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Ryder System is a full-service truck leasing, maintenance, and rental firm with operations in North America...

Ryder System is a full-service truck leasing, maintenance, and rental firm with operations in North America and Europe. The firm forecasts the following financial statements in North America and Europe. The firm forecasts the following financial statements for 2018 and 2019 (in millions):

2018 2019

Revenues $5,192.00 $5,400.0

Operating Expenses $3,768.5 $3848.0

Depreciation $573.5 $580.0

Interest Expenses $170.0 $172.0

Taxes $652.1 $670.0

Net Income $117.9 $130.0

Increase in Net Working Capital $57.2 ($462.0)

The firm estimates capital expenditures of $800 million in 2018 and $850 million in 2019. What is the value of the firm today if we assume that the free cash flows will grow at 4.5% per year from 2020 onward and the firm has a weighted average cost of capital of 16.5%?

Solutions

Expert Solution

Step1: Computation of operating free cash flow(OFCF) for the year 2018 and 2019.We have,

OFCF = EBIT(1-T) + depreciation - Capital Expenditure - Changes in working capital

For 2018,

EBIT( 1-T) = Sales Revenue - Operating expenses - Depreciation - Tax expense

EBIT(1-T) = 5,192 - 3,768.5 - 573.5 - 652.1 = 197.9 million

OFCF = 197.9 + 573.5 - 800 - 57.2 = - $ 85.8 million

For 2019:

EBIT(1-T) = 5,400 - 3,848 - 580 - 670 = $ 302 million

OFCF = 302 + 580 - 850 - (- 462)

OFCF = $ 494 million

Step2: Computation of the value of firm today.We have,

Growth rate (g) = 4.5 %

Weighted average cost of capital (WACC) = 16.5 %

Value of the firm = OFCF(2018) / (1 + wacc) + OFCF(2019) / (1+wacc)² + OFCF(2019)(1+g) /

( wacc - g) / (1+wacc)²

Value of the Firm = - 85.8 / (1.165) + 494/(1.165)² + 494(1.045) / (0.165 - 0.045) / (1.165)²

Value of the Firm = - 73.65 + 363.98 + 3,169.64

Value of the Firm = $ 3,459.97 million

Hence, the value of the firm today is $ 3,459.97 million.

jeff jeffy answered 1 year ago

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