You have been asked to value Delta Corp and have come up with the following inputs:...

You have been asked to value Delta Corp and have come up with the following inputs:

	Delta 2019
Revenues	$1,500
COGS (w/o Depreciation) as % of Revenue	50%
Depreciation	$40.00
Tax Rate	35.00%
Capital Expenditure	$60.00
Working Capital (as % of Revenue)	30.00%
Beta during the high growth period	1.50
Expected Growth Rate in Revenues &EBIT during the high growth period	30.00%
Expected Period of High Growth	3 years
Growth rate After High-Growth Period	5.00%
Beta After High-Growth Period	1.20

Capital expenditure will be offset by depreciation after the high-growth period. No debt outstanding. The Treasury bond rate is 8% and the market risk premium (MRP) is 5.5%.

Required:

1) What is your estimate to the appropriate discount rates during the high-growth period and stable growth period?

2) What is your estimate to the terminal value (TV) for the firm (at the end of the third year)?

3) What is your estimate to the value of the firm, using the FCFF model?

Solutions

Expert Solution

(1)

.	High Growth	Stable Growth
Growth in Revenue & EBIT	30%	5.00%
Growth in capital expenfiture and Depreciation	30%	Capital expenditure will be offset by depreciation
Risk Free rate(Rf)	8%	8%
market risk premium (MRP)	5.50%	5.50%
Beta	1.5	1.2

As there is No debt outstanding, hence Cost of capital = Cost of equity

discount rates during the high-growth period or Cost of equity = Rf+Beta * MRP = 8% +1.5*5.5% =16.25%

discount rates during the Stable growth period or Cost of equity=Rf+Beta * MRP = 8% +1.2*5.5% =14.60%

(2)

Revenues	1,500
COGS(Revenue*50%)	750
Depreciation	40

Current year EBIT	710

Terminal Value at the year end 3 =

Terminal FCFF=1,015.18

K = Terminal cost of capital = 14.60%

g = terminal Growth rate = 5%

hence

Terminal Value at the year end 3 =

estimated terminal value (TV) for the firm (at the end of the third year) = $10574.78

----------------------------------------------------------

(3)

	A		B		*AB**
Year	Cash flow		[email protected]%		Present value of cash flows
1	438.95	FCFF	0.8602150538	=1/(1.1625)^1	377.59
2	570.64	FCFF	0.7399699387	=1/(1.1625)^2	422.25
3	741.83	FCFF	0.6365332806	=1/(1.1625)^3	472.20
3	10574.78	Terminal value	0.6365332806	=1/(1.1625)^3	6731.20
				value of the firm	$8003.24

jeff jeffy answered 2 years ago

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