Question

Assume that today is December 31, 2014, and that the following information applies the Vermeil Airlines:

Revenue for 2015 is expected to be $1,750 million

Operating Expenses (including depreciation and amortization) are expected to be $1,075 million

Depreciation and amortization for 2015 will be $100 million

The company expects to have a 29.926% tax rate

The change in gross property, plant & equipment (PP&E) is expected to be $200 million

The company anticipates that the change in net operating working capital (NOWC) from 2014 to 2015 will be $85 million

The company anticipates that it will grow at a constant rate of 6% in to perpetuity

Vermeil’s beta is 1.15, the current treasury yield is 3.25% and the historical return on the market is 12.598%

The company’s Total Assets are $6,558.35 million, and the company’s debt is $3,000 million

The before-tax cost of debt is 7.50%

The company has 200 million shares outstanding

Questions:

What is the value of the total company?

What is the value of the company’s equity?

What is the company worth on a per share basis?

If the company is offered $40 per share by its competitor, Destiny Airways, should the Board of Directors accept the offer? Why or why not?

Answer 1

Expected Revenue (2015) = $1750 million

Operating Expense = $ 1075 million

Therefore, Operating Profit = Revenue - Operating Expense

= 1750 - 1075

= $ 675 million

Net Operating profit After Tax (NOPAT) = Operating profit * (1 - tax rate)

= 675 * (1 - 0.29926)

= $ 472.9995 $ 473 million

Free Cash Flow to Firm = NOPAT + Depriciation - Change in Net Working Capital - Capital Expenditure

= 473 + 100 - 85 - 200

= $ 288 million

Therefore,

where g is growth rate = 6%

To calculate WACC, we first need Cost of Equity K_e

K_e = R_F + * (R_M - R_F) (CAPM model)

= 3.25% + 1.15 * ( 12.598% - 3.25%)

= 14%

Now,

Debt (D) = $3000 million

Equity (E) = Total Assets - Debt

= 6558.35 - 3000

= $ 3558.35 million

= (3558.35 / 6558.35) * 14% + (3000 / 6558.35) * (1 - 0.29926) * 7.5%

= 10%

Therefore,

= $ 6768 million ....................................Answer

Intrinsic Value of Equity = V_Op - Debt

= 6768 - 3000

= $ 3768 million ...............................Answer

Share Price = Value of Equity / Shares Outstanding

= 3768 / 200

= $ 18.84

If a competitor is paying $40 per share for the company then company should accept the offer because the competitior is overvaluing the equity of our company by 40 - 18..84 = $ 21.16 per share

So it is a good deal