In: Finance
Lockheed Corporation reported EBITDA of $4,000 million in the year just ended (year 0), prior to interest expenses of $1,000 million and depreciation charges of $600 million. Capital expenditures in the year just ended amounted to $1,000 million, and working capital was 8% of revenues (which was $20,000 million). The tax rate for the firm was 40%.
The firm had debt outstanding of $18.00 billion (in book value terms), trading at a market value of $20.0 billion and yield a pre-tax interest rate of 8%.
There were 100 million shares outstanding, trading at $250 per share, and the most recent beta was 1.20. The Treasury bond rate was 3%, and the market risk premium was 6.5%.
The firm expected revenues, earnings (EBITDA) and depreciation to grow at 10% a year from the current year (year 0) to year 3, after which the growth rate was expected to drop to 3% a year forever.
Capital expenditures will also grow at 10% a year from year 0 to year 3, but capital spending will be 120% of depreciation in the steady state period. The company also planned to lower its debt/equity ratio to 60% for the steady state which will result in the pretax interest rate dropping to 6%. As a result of the lowering of the firm’s debt/equity ratio, the beta of the firm is also expected to decline.
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Cost of Equity Before Year 3 =
WACC Before Year 3 =
Cost of Equity After Year 3 =
WACC After Year 3 =
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Free Cash Flow to Firm |
Lockheed has $800 million in cash, and it also owns 10% of the stock of ABC Corporation. ABC Corporation has 100 million shares outstanding, and its shares are trading at $50/share. Estimate the Intrinsic Value of Equity and estimate the current share price of Lockheed.