Question

You need to estimate the value of Laputa Aviation. You have the following forecasts (in millions of dollars) of its profits and of its future investments in new plant and working capital:

	Year
		1			2			3			4
Earnings before interest, taxes, depreciation, and amortization (EBITDA)	$	75		$	95		$	110		$	115
Depreciation		15			25			30			35
Pretax profit		60			70			80			80
Tax at 40%		24			28			32			32
Investment		17			20			23			25

From year 5 onward, EBITDA, depreciation, and investment are expected to remain unchanged at year-4 levels. Laputa is financed 40% by equity and 60% by debt. Its cost of equity is 16%, its debt yields 7%, and it pays corporate tax at 40%.

a. Estimate the company’s total value. (Do not round intermediate calculations. Enter your answer in millions rounded to the nearest whole amount.)

b. What is the value of Laputa’s equity? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Answer 1

Income Statement of Laputa Aviation (Currency in Dollar)

Particulars

1

2

3

4

EBITDA	75	95	110	115
DEPRECIATION	15	25	30	35
PROFIT BEFORE TAX(PBT	60	70	80	80
TAX @40%	26	28	32	32
PAT= PBT-TAX	34	42	48	48
Operating cash flow dep+PAT	49	67	78	83
Investment	17	20	23	25
Free cash flow=Cash flow-investment	32	47	55	58

calculation of WACC

WEIGHT COST POST TAX WEIGHTED COST

EQUITY 40% 16% 16% 6.4

DEBT 60% 7% 7%(1-.40)(note)    2.52

TOTAL WACC 8.92

ANS a) company's total value

terminal value at year4 =free cash flow at year4 / wacc

=58/0.0892

= 650.224

year	free cash flow	PV [email protected]%	PV of Cash flow
1	32	0.918	29.376
2	47	0.843	39.621
3	55	0.774	42.57
4	58	0.710	41.18
4	terminal value 650.224	0.710	461.66
		TOTAL	614.407

ANS b) Calculation of Laputa's Equity

Company's total value = 614.407

therefore, value of Debt = 60% * 614.407 = 368.644

value of equity = 40% * 614.407 = 245.763

Note:- Post tax of Debt comprises of Tax Sheild Concept, means benefit of tax on Debt proportion is availed