Question

At the end of the financial year 2019, Strong Tool Company anticipated its revenues, expenses, capital expenditures and changes in working capital over the next 3 years (2020-2022) to be as shown in the table below.

Year	Revenues	Expenses	Capital Expenditures	Incremental Changes in Working Capital
2020	$400,000	$200,000	$40,000	$15,000
2021	$410,000	$200,000	$60,000	‒ $25,000
2020	$420,000	$200,000	$80,000	$35,000

The company estimated the depreciation charges to be fixed at $15,000 every year. The firm has a tax rate of 28% and a cost of capital of 15%.

Requirement 1: You are required to estimate the free cashflow available to the firm (FCFF) for the period of 2020-2022. Calculate each of the missing values in the table below (there are 20 missing values in total).

Year	2020	2021	2022
EBIDTA	1)	2)	3)
Depreciation	15,000	15,000	15,000
EBIT	4)	5)	6)
TAXES	7)	8)	9)
EAT	10)	11)	12)
Depreciation	15,000	15,000	15,000
Capital Expenditure	13)	14)	15)
Increase in Working Capital	16)	17)	18)
FCFF	19)	20)	47,600

Requirement 2 Free cash flows beyond year 3 are estimated to grow at an annual rate of 5%. Apply the growing perpetuity formula to estimate the terminal value of Strong Tool Company as of year 3. What is the value of the terminal value today?

Requirement 3 Strong Tool Company's current value of existing debt is ​$80,000. Estimate the value of the equity of the company by applying the free cash flow to the firm method.

Answer 1