Question

Do Pham is evaluating Phaneuf Accelerateur by using the FCFF and FCFE valuation
approaches. Pham has collected the following information (currency in euros):
• Phaneuf has net income of €250 million, depreciation of €90 million, capital expenditures
of €170 million, and an increase in working capital of €40 million.
• Phaneuf will finance 40 percent of the increase in net fixed assets (capital expenditures
less depreciation) and 40 percent of the increase in working capital with debt financing.
• Interest expenses are €150 million. The current market value of Phaneuf’s outstanding
debt is €1,800 million.
• FCFF is expected to grow at 6.0 percent indefinitely, and FCFE is expected to grow at
7.0 percent.
• The tax rate is 30 percent.
• Phaneuf is financed with 40 percent debt and 60 percent equity. The before-tax cost of
debt is 9 percent, and the before-tax cost of equity is 13 percent.
• Phaneuf has 10 million outstanding shares.

Using the 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

Step 1 : Free Cash Flow to Firm (FCFF):

= Net Income + Depreciation - Capital Expenditure - Increase in Working Capital + Interest (1-tax)

=  €250 million + €90 million -  €170 million - €40 million + €150 million (1 - 0.30)

Therefore, FCFF =  €235 million

Step 2 : Weighted Average Cost of Capital (WACC):

Cost of Debt = 9%

Cost of Equity = 13%

Debt = 40%, Equity = 60%

WACC = (0.40) (9%) (1 - 0.30)  + (0.60) (13%) = 10.32%

Step 3 : Total Value of Firm:

Value of Firm = FCFF₀ (1 + g) / (WACC - g)

= 235 (1.06) / (0.1032 - 0.06)

= 249.10 / 0.0432

Therefore, Total Value of the Firm = €5,766.20 million

Step 4 : Market Value of Equity:

= Total Value of Firm (as calculated above) - Market Value of Debt

= €5,766.20 million - €1,800 million

Market Value of Equity = €3966.20 million

Step 5 : Per Share Value of Equity:

= Total Equity (as calculated above) / Number of Shares

= €3966.20 million / 10 million

= €396.62 per share