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Do Pham is evaluating Phaneuf Accelerateur by using the FCFF and FCFE valuation approaches. Pham has...

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.

Solutions

Expert Solution

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

jeff jeffy answered 2 years ago
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