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Skeets Mfg Inc forecasts the following financial information for the next 3 years (in millions):                           &

Skeets Mfg Inc forecasts the following financial information for the next 3 years (in millions):

                                       Year 1                 Year 2                 Year 3

Revenues                       $25,200              $27,540              $32,300

Operating Expenses      $13,650              $13,848              $14,200

Depreciation                  $6,573                $5,580                $6,750

EBIT                                $4,977                $8,112                $11,350

Interest Expenses          $1,170                $1,572                $1,325

Taxes                              $1,332                $2,289                $3,509

Net Income                    $2,475                $4,251                $6,516

Increase in NWC            $165                   $420                   $735

The firm estimates capital expenditures of $1,200 million in year1, $750 million in year 2 and $1,550 million in year 3. Determine the value of the firm today if we assume that the free cash flows will grow at 3% per year indefinitely after year 3 and the firm has a weighted average cost of capital of 14%?

Solutions

Expert Solution

The value of the firm is $99,719.

The very first step is to compute free cash flow to the firm, using the formula show in screenshot.

Then, you have to compute the discount factor, which is 1/(1+WACC)^No of year

After you multiply and sum the PV of all the 3 year cash flows, you have to compute the present value of terminal cash flows, as after this point the cash flows grow at a 3% rate perpetually.

The formula for that is :-

FCFF For 3rd year (1+Growth rate) / (WACC - Growth rate) * Discount factor of third year.

After adding these both present values, you'd get the value of firm.

jeff jeffy answered 2 years ago
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