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3. LAMA Corporation, one of the largest defense contractors in the U.S., reported EBITDA of $1290...

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.

Solutions

Expert Solution

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

jeff jeffy answered 1 year ago
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