Question

Suppose you estimate the WACC of the following firm to be 9.5%. You have prepared a 5 year forecast of NOPAT and planned capital expenditures. Beyond the forecast horizon, the firm plans to pay out 85% of its NOPAT and believes it can maintain the ROIC realized in the final year of the forecast indefinitely. If the firm in question currently has $37.5 million in Invested Capital, what is your estimate of the current Market Value of the firm?

Values in Millions

YEAR	0	1	2	3	4	5
NOPAT		5.63	5.01	5.07	5.12	5.02
REINVESTMENT RATE		100%	75%	60%	40%	20%

Answer 1

For Calculating the expected market value of firm, we need to find out the Free Cashflow to Firm for the initial period and then terminal value at the end of high growth period. Then we need to discount everything back to find out the present value of all expected cashflows to arrive at the expected market value of firm.

Formulas Used in the excel file to arrive at that are in the attached excel file. These are explained as follows:

Invested Capital at year end_t = Invested Capital _(t-1) + NOPAT_t * Reinvestment_t

Return On invested Capital_t = NOPAT_t / Invested Capital _(t-1)

Growth = Reinvestment Rate * Return on Invested Capital

NOPAT_t = NOPAT _(t-1) * (1 + Growth Rate _(t-1))

FCFF = NOPAT * (1 - Reinvestment Rate)

Terminal Value_t = FCFF_(t+1) / (WACC - Growth Rate)

By using above formulas in the shown way above, we have arrived at the following results.

Thus, expected market value of firm should be equal to $41.59 million.