Question

In: Finance

You need to estimate the value of Laputa Aviation. You have the following forecasts (in millions...

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.)

Solutions

Expert Solution

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


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