Question

In: Finance

When DFC is used on their valuation, company ABC for the current year pretax operating income...

When DFC is used on their valuation, company ABC for the current year pretax operating income of $750,000. Income has grown 2% annually during the last five years, and is expected to continue growing at that rate for the next two years. Net operating working capital increased by $60,000 during the current year and current year capital spending on long-lived assets exceeded depreciation by $75,000. Both working capital and the excess of capital spending over depreciation are projected to grow at the same rate as operating income. Subsequent to the second year, you believe the pretax operating income growth rate will increase to 3% per year and remain at that level into the foreseeable future. The 10-year Treasury bond rate is 2.5%, the equity risk premium is 5.5%, and the marginal federal, state, and local tax rate is 35%. ABC's beta and its target debt-to-equity ratio are 1.74 and 0.67, respectively. Its pretax cost of borrowing, based on its recent borrowing activities, is 9%. please calculate the enterprise value

Solutions

Expert Solution

Cost of equity = Risk Free rate + (Market Risk Premium × Beta)

= 2.50% + (5.50% × 1.74)

= 2.50% + 9.57%

= 12.07%

COst of equity is 12.07%.

Debt equity ratio = 0.67

Weight of debt = 0.67 / (1 + 0.67)

= 40%

Weight of equity = 60%

Target capital structure weight of debt is 40% and weight of equity is 60%.

WACC is calculated below:

WACC = (60% × 12.07%) + (40% × 9%) × (1 - 35%)

= 7.24% + 2.34%

= 9.58%

WACC that is cost of capital of company is 9.58%.

Free Cash flow = NOPAT - Change in working capital - Capex

= $750,000 × (1 - 35%) - $60,000 - $75,000

= $487,500 - $135,000

= $352,500.

free cash flow of firm in current year is $352,500. Free cash flow will grow at 2% for next 2 year and after that grow at 3% forever.

So,using DCF method, value of firm is calculated in excel and screen shot providedbelow:

Value of firm is $5,412,776.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

In the current year, Riflebird Company had operating income of $220,000, operating expenses of $175,000, and...
In the current year, Riflebird Company had operating income of $220,000, operating expenses of $175,000, and a long-term capital loss of $10,000. How do Riflebird Company and Roger, the sole owner of Riflebird, report this information on their respective Federal income tax returns for the current year under the following assumptions? If an amount is zero, enter "0". a. Riflebird Company is a proprietorship (Roger did not make any withdrawals from the business). Roger reports $ net operating profit and...
Tacks Limited Corp. has pretax income for the current year of $1,500,000. The company recorded straight-line...
Tacks Limited Corp. has pretax income for the current year of $1,500,000. The company recorded straight-line depreciation expense of $150,000. The tax allowance is $300,000. Tax-exempt revenue is $225,000 included in net income.The company also had an impaired asset write-down of $50,000 which is not deductible for tax purposes. Based on this information and a 34% statutory tax rate, the firm's taxable income and net deferred tax implications are
(NOL Carryforward, Valuation Account Needed) Topper Company reported the following pretax financial income (loss) for the...
(NOL Carryforward, Valuation Account Needed) Topper Company reported the following pretax financial income (loss) for the years 2018 through 2022: 2018 $ 70,000 2019 45,000 2020 (260,000) 2021 90,000 2022 215,000 Pretax financial income (loss) and taxable income (loss) were the same for all years involved. The enacted tax rate was 30% for 2018 through 2020, and 20% for 2021 and thereafter. Instructions (a) Prepare the journal entries for the years 2018 through 2022 to record income tax expense, income...
     In the first year of operations in 2017, the pretax accounting income of Lisle Company...
     In the first year of operations in 2017, the pretax accounting income of Lisle Company was$16,000. Included in pretax accounting income were the following:      (2) $33,000 of sales revenue that will not be recognized for tax purposes until it is collected; (3) $32,000 in warranty expense that was recognized as product sales were made according to GAAP, but will be deductible for tax purposes only when the actual disbursements are made; and. (1) $4,000 expense for a premium...
Company A is operating at full capacity, sold 45,600 units during the current year. Its income...
Company A is operating at full capacity, sold 45,600 units during the current year. Its income statement is as follows: Sales $5,654,400 Cost of goods sold 3,618,816 Gross profit $2,035,584 Expenses: Selling expenses $984,000 Administrative expenses 430,000 Total expenses 1,414,000 Income from operations $ 621,584 The division of costs between variable and fixed is as follows: (round to nearest dollar) Variable Fixed Cost of goods sold 70% 30% Selling expenses 20% 80% Administrative expenses 10% 90% Management is planning to...
For 2018 tax purposes, Cass Corporation reported pretax book income of $10,000,000. During the current year,...
For 2018 tax purposes, Cass Corporation reported pretax book income of $10,000,000. During the current year, the reserve for bad debts increased by $100,000. In addition, tax depreciation​ exceeded book depreciation by $200,000. Cass Corporation sold a fixed asset and​ reported book gain of $50,000 and tax gain of $75,000. Finally, the company received​ $250,000 of tax-exempt life insurance proceeds from the death of one of its​ officers. Compute the company’s current income tax expense or benefit.
Year Pretax income with weighted average pretax income with FIFO 2018 210,000 240,000 2019 250,000 290,000...
Year Pretax income with weighted average pretax income with FIFO 2018 210,000 240,000 2019 250,000 290,000 2020 175,000 190,000 30% tax. How much would be retained earning due to change in inventory methods? -49,000 -85,000 -70,000 -59,500
In the current year, Azure Company has $350,000 of net operating income before deducting any compensation...
In the current year, Azure Company has $350,000 of net operating income before deducting any compensation or other payment to its sole owner, Sasha. In addition, Azure has interest on municipal bonds of $25,000. Sasha has significant income from other sources and is in the 39.6% marginal tax bracket. Based on this information, determine the income tax consequences to Azure Company and to Sasha during the year for each of the following independent situations. (Ignore the 3.8% Medicare surtax on...
In the current year, Azure Company has $350,000 of net operating income before deducting any compensation...
In the current year, Azure Company has $350,000 of net operating income before deducting any compensation or other payment to its sole owner, Sasha. In addition, Azure has interest on municipal bonds of $25,000. Sasha has significant income from other sources and is in the 39.6% marginal tax bracket. Based on this information, determine the income tax consequences to Azure Company and to Sasha during the year for each of the following independent situations. (Ignore the 3.8% Medicare surtax on...
If a company were to choose one inventory valuation method in the current year, and then...
If a company were to choose one inventory valuation method in the current year, and then decide in the following year to change inventory valuation methods to a method that better approximates the company’s actual costs: Would this be accounted for as a change in accounting estimate or a change in accounting principle?   (Provide the Codification reference for your answer) Where is the Example provided in the Codification that illustrates the guidance for the retrospective application of a change from...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT