Question

Steven is evaluating Elion Inc by using FCFF valuation approach. He has collected the following information: Net income is $187 million, depreciation $40 million, capital expenditures $118 million, and an increase in working capital of $18 million Interest expenses are $35 million. Current market value of outstanding debt is $573 million. FCFE is expected to grow at 3% indefinitely. The tax rate is 28%. Company is financed with 60% debt and 40% of equity (Hint: WACC weights). The before-tax cost of debt is 6.5% and the cost of equity is 15%. There are 100 million shares outstanding.

Using FCFF valuation approach, estimate the total value of the firm, the total market value of equity and the per-share value of equity.

Answer 1

Given :	Amt in $ Million
Net Income =	187.00
Depreciation expense	40.00
Interest Expense =	35.00
Capital Expenditure =	118.00
Increase in Net Working Capital	18.00
Tax rate	28%

Free Cash flow to Firm =Net Income+ Depreciation+Interest expense*(1-Tax rate)-Capital Expense-Increase in Net

working Capital

FCFF =187+40+35*(1-28%)-118-18

116.20

Million

Let us find the WACC:

Debt =60%

Equity =40%

Cost of Debt =6.5%.

After Tax cost of Debt =6.5%*(1-28%)=4.68%

Cost Of Equity=15%

WACC =60%*4.68%+40%*15%=8.81%

The growth rate of FCF is 3%

So the PV of Future FCFF =116.20*(1+2%)/(8.81%-2%)=

$             1,740.44

million

So Total Value of the Firm is $1,740.44 Million

Value of Debt =$573 Million

So Equity Value =$1740.44-$573=$1,167.44 Million

No of shares outstanding =100 million

So Value per share =$1167.44/100=$11.67