Question

3. LAMA Corporation, one of the largest defense contractors in the U.S., reported EBITDA of $1290 million in 1993, prior to interest expenses of $215 million and depreciation charges of $400 million. Capital Expenditures in 1993 amounted to $450 million, and working capital was 7% of revenues (which were $13,500 million). The firm had debt outstanding of $3.068 billion (in book value terms), trading at a market value of $3.2 billion, and yielding a pre-tax interest rate of 8%. There were 62 million shares outstanding, trading at $64 per share, and the most recent beta is 1.10. The tax rate for the firm is 40%. (The treasury bond rate is 7%.)

The firm expects revenues, earnings, capital expenditures and depreciation to grow at 9.5% a year from 1994 to 1998, after which the growth rate is expected to drop to 4%. (Capital spending will offset depreciation in the steady state period.) The company also plans to lower its debt/equity ratio to 50% for the steady state (which will result in the pre-tax interest rate dropping to 7.5%.)

A. Estimate the value of the firm.

B. Estimate the value of the equity in the firm and the value per share.

Answer 1

Yr	EBITDA	Deprec'n	EBIT	EBIT	Cap	_ WC	FCFF	Term
				(1-t)	Exp.			Value
0	$1,290	$400	$890	$534	$450	$82	$402
1	$1,413	$438	$975	$585	$493	$90	$440
2	$1,547	$480	$1,067	$640	$540	$98	$482
3	$1,694	$525	$1,169	$701	$591	$108	$528
4	$1,855	$575	$1,280	$768	$647	$118	$578
5	$2,031	$630	$1,401	$841	$708	$129	$633	$14,326
			'93-97	After 1998
	Cost of Equity =	13.05%	12.30%
	AT Cost of Debt =	4.80%	4.50%
	Cost of Capital =	9.37%	9.69%

Terminal Value

= {EBIT (1-t)(1+g) - (Rev1998 - Rev1997) * WC as % of Rev}/(WACC-g)

= (841 * 1.04) - (13500 * 1.0955 * 1.04 - 13500 * 1.0955)

* 0.07 /(.0969-.04) = $14,326

Value of the Firm

= 440/1.0937 + 482/1.09372 + 528/1.09373 + 578/1.09374 + (633 + 14941)/1.09375 = $11,172

B. Value of Equity in the Firm = ($11566 - Market Value of Debt) = 11172 - 3200 = $7,972

Value Per Share = $7,972/62 = $128.57