Question

We find the following information on NPNG (No-Pain-No-Gain) Inc.

EBIT = $2,000,000 Depreciation = $250,000

Change in net working capital = $100,000

Net capital spending = $300,000

These numbers are projected to increase at the following supernormal rates for the next three years, and 5% after the third year for the foreseeable future:

EBIT: 10%

Depreciation: 15%

Change in net working capital: 20%

Net capital spending: 15%

The firm’s tax rate is 35%, and it has 1,000,000 outstanding shares and $6,000,000 in debt. We have estimated the WACC to be 15%.

a. Calculate the EBIT, Depreciation, Changes in NWC, and Net Capital Spending for the next four years.

b. Calculate the CFA* for each of the next four years, using the following formula: CFA* = EBIT(1 – T) + Depr – ?NWC – NCS

d. Calculate the present value of growing perpetuity at Year 3. (1 mark)

e. Calculate the firm’s value at time 0 using the WACC of the firm as the discount rate. (Note that the first CFA* to be discounted is the cash flow from one year into the future.)

f. Calculate the firm’s equity value at time 0. (1 mark) g. Calculate the firm’s share price at time 0. (1 mark)

Could you please demonstrate how each section is calculated

Answer 1

Ans: a) & b) As per the given information refer to the following table

d) Refer to the image, here at year 3 operating cash flow is $18,63,377 (Net income + Depreciation)

PV = Future Value/(1+r)ⁿ

Here Future value at year 3 is the operating cash flow , n =3, discount rate = WACC rate i.e. 15%

PV = $18,63,377/(1+.15)³

PV = $18,63,377/(1.15)³

PV = $18,63,377/1.520

PV = $12,25,200

e) Firm’s value at the time 0

Firm Value = Free cash flow to equity/(1+WACC)

As we know that Free cash flow to equity is the cash available for equity shareholders after paying for all expenses, debt.

Here Free cash flow for year 0 is $4,87,500

Firm Value = $4,87,500/(1+.15)

Firm Value on year 0 = $4,23,913

f) Price per share = Enterprise Value/ Number of shares outstanding

in year 0 as we calculated enterprise value/firm value is $4,23,913 & 1,000,000 shares outstanding.

Thus Price per share = $4,23,913/1,000,000

Price of share = $.42