Question

You are trying to calculate the enterprise value of DCB Corp using a free cash flow model. To that end you have put together some forecast for year 1 in the table below. Assume that free cash flows will grow at 1.5% in perpetuity and that the weighted average cost of capital of the firm (WACC) is 8%. Using this information, calculate the enterprise value of the firm. Express your answer in $-millions and round to two decimals (do not include the $-sign in your answer).

Forecasts for Year 1 (in $ millions)

Sales	132
Cost of sales	48
Selling, general and administrative expenses	8
Depreciation	28
Increase in Net Working Capital	7
Capital expenditures	30
Marginal corporate tax rate	28%

Answer 1

Calculation of the enterprise value:

Enterprise value = Free cash flow in year 1 / (WACC -Growth rate)

Step 1: Calculation of free cash flow in year 1:

	Sales		132.00
Less:	Less: Cost of goods sold		48.00
	Gross Margin		84.00
Less:	Depreciation expenses		28.00
Less:	Selling, general and admin exp		8.00
	Profit before tax		48.00
	Tax @28%		13.44
	Profit after tax		34.56
Add:	Depreciation expenses		28.00
Less:	Increase in working capital		7.00
less:	Capital expenditure		30.00
	Free cash flow		25.56

Step 2: Value of the enterprise = $25.56 / (8% - 1.50%)

= $25.56 / 6.50%

= 393.23 million (Answer)