Question

In: Finance

At the end of 2007, you forecast CF for a firm with net deb of 759...

At the end of 2007, you forecast CF for a firm with net deb of 759 million that costs 7% percent annually.

NOPAT in 2007,2008,2009 respectively: 1450$, 1576$, 1718$.

FCF to equity in 2007,2008,2009 respectively:1020, 1124, 1200.

You forecast that both CF will grow at a rate of 4% after 2009. Use require return on equity of 21% and tax of 35%, calculate market value of equity and market value of assets at end of 2006

Expert Solution

Solution:-

a) Calculation of market value of equity

Free cash flows

Year 2007 =$1120 mil

Year 2008=$1124 mil

Year 2009=$ 1200 mil

Growth rate = 4%

Year 2010= $1200*(1+g)=$1200*1.04= $1248 mil

Note:- Since the cash flow are not clear , we are assuming that figures are given in millions.

Terminal value of cash flow at 2009 = Free cash flow of 2010/(Ke-g)

Where ke= required rate of return of equity

g= growth rate

Substituting the value,

Terminal value= $1248/(0.21-0.04)

= $7341.1764 million

Total market value of equity=

FCF20007/(1+RR)+FCF2008/(1+RR)^2+FCF2009/(1+RR)^3+Terminal value/(1+RR)^3

Where, FCF2007 =Free cash flow of 2007 and so on

RR= required rate of return on equity= 21%

Now substituting the values .

Total market value of equity

=1120/1.21+1124/(1.21)^2+1200/(1.21)^3+7341.1764/(1.21)^3

=925.6198+767.7071+677.3687+4143.9027

=$6,514.60 million

Hence the market value of equity at 2006 end= $6,514.60 million

b) Value of asset at 2006 end

=Market value of equity+ Market value of debt

=$6,514.60+759.00

=$7,273.60 million

Please feel free to ask if you have any query in the comment section.

jeff jeffy answered 2 years ago

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