Innovation Incorporated had operating income before interest and taxes in 2018 of $350 million. The firm...

Innovation Incorporated had operating income before interest and taxes in 2018 of $350 million. The firm was expected to generate this level of operating income indefinitely. The firm had depreciation expense of $25 million that same year. Capital spending totaled $40 million during 2018. At the end of 2017 and 2018, working capital totaled $90 and $70 million, respectively. The firm’s combined marginal state, local, and federal tax rate was 30% and its debt outstanding had a market value of $0.50 billion. The 10-year Treasury bond rate is 3% and the borrowing rate for companies exhibiting levels of creditworthiness similar to Innovation, Inc. is 8%. The historical risk premium for stocks over the risk-free rate of return is 4.5%. No Growth’s beta was estimated to be 1.2. The firm had 3 million common shares outstanding at the end of 2018. Innovation’s target debt to total capital ratio is 40%.

Estimate free cash flow to the firm in 2018.
Estimate the firm’s cost of capital.
Estimate the value of the firm (i.e., includes the value of equity and debt) at the end of 2018, assuming that it will generate the value of free cash flow estimated in (a) indefinitely.
Estimate the value of the equity of the firm at the end of 2018.

Estimate the value per share at the end of 2018.

Expert Solution

a]	EBIT	$ 350.000	million
	+Depreciation	$ 25.000	million
	-Taxes [350*40%]	$ 140.000	million
	-Capital expenditure	$ 40.000	million
	-Change in NWC [70-90]	$ (20.000)	million
	FCF for 2018	$ 215.000	million
b]	After tax cost of debt = 8%*(1-40%) =	4.80%
	Cost of equity per CAPM = 3%+1.2*4.5% =	8.40%
	WACC = 4.80%40%+8.40%60% =	6.96%
c]	Value of the firm = 215/6.96% =	$ 3,089.080	million
d]	Value of the firm	$ 3,089.080	million
	Less: Value of debt	$ 500.000	million
	Value of equity	$ 2,589.080	million
e]	Number of shares	3	million
	Value per share	$ 863.03

jeff jeffy answered 1 year ago

No Growth Incorporated had operating income before interest and taxes in 2011 of $250 million. The...

No Growth Incorporated had operating income before interest and taxes in 2011 of $250 million. The firm was expected to generate this level of operating income indefinitely. The firm had depreciation expense of $12 million that same year. Capital spending totaled $15 million during 2011. At the end of 2010 and 2011, working capital totaled $60 and $70 million, respectively. The firm’s combined marginal state, local, and federal tax rate was 40% and its debt outstanding had a market value...

No Growth Incorporated had operating income before interest and taxes in 2011 of $225 million.The firm...

No Growth Incorporated had operating income before interest and taxes in 2011 of $225 million.The firm was expected to generate this level of operating income indefinitely. The firm had depreciation expense of $9.5 million that same year.Capital spending totaled $20 million during 2011. At the end of 2010 and 2011, working capital totaled $70 and $80 million, respectively.The firm’s combined marginal state, local, and federal tax rate was 30% and its debt outstanding had a market value of $1 billion.The...

A company had earnings before interest and taxes of $1.5 million in the most recent year,...

A company had earnings before interest and taxes of $1.5 million in the most recent year, and an interest expense of $250,000. The company has a marginal corporate tax rate of 35%. What is the net income for the leveraged company? What about the same company had they not used leverage (debt)? a) If we compare the leveraged with the unleveraged company, how much was paid out to debt holders, equity holders, and total between the two? b) We should...

The Mason Corporation’s income before interest, depreciation, and taxes (i.e., EBITDA) was $2.05 million in the...

The Mason Corporation’s income before interest, depreciation, and taxes (i.e., EBITDA) was $2.05 million in the year just ended. The firm expects its EBITDA to grow by 2.3% per year forever. To make this happen, the firm will have to invest in plants and equipments an amount equal to 24% of its pre tax operating cash flow (i.e., EBITDA) each year. The tax rate is 30%, depreciation in the year just ended was $233,500, and is expected to grow at...

In 2020, Garage Doors Inc. had sales of $350 million. Operating costs, depreciation and interest were...

In 2020, Garage Doors Inc. had sales of $350 million. Operating costs, depreciation and interest were $230 million, $30 million and $10 million respectively. It’s corporate tax rate is 40%. The company reported $40 million in operating current assets and $14 million in operating current liabilities. It also reported net property, plant and equipment of $70 million and Long Term Debt $180 million. For 2019, net operating working capital was $28 million, net property, plant and equipment was $60 million...

Halogen Inc. is an unlevered firm, has expected earnings before interest and taxes of $2 million...

Halogen Inc. is an unlevered firm, has expected earnings before interest and taxes of $2 million per yearHalogen Inc tax rate is 40%, and the market value is V=E $12 million. The stock has a beta of 1.0, and the risk free rate is 9%. Assume that E(Rm)-Rf-6%). Management is considering the use of debt; debt would be issued and used to buy back stock, and the size of the firm would remain constant. The default free interest rate on...

A firm has generated $150 million in earnings before interest and taxes last year and expects...

A firm has generated $150 million in earnings before interest and taxes last year and expects these earnings to grow 10% a year for the next 3 years. The firm is expected to generate a return on capital of 20% on new investments for the next 3 years, and there is no efficiency growth. After year 3, the firm will be in stable growth, growing 3% a year in perpetuity, with a return on capital of 12% and a cost...

katie had a before-tax income of $40,000 and paid taxes of $6,000. Ramesh had a before...

katie had a before-tax income of $40,000 and paid taxes of $6,000. Ramesh had a before tax income of $35,000 and paid taxes of $5,250. Based on this information, the tax system is ..... a.regressive for all income levels below $40,000 b. proportional c. progressive d. based on the benefits-received principle e. regressive for income levels between $35,000 and $40,000

NDR, Inc., an unlevered firm, has expected earnings before interest and taxes of $2 million per...

NDR, Inc., an unlevered firm, has expected earnings before interest and taxes of $2 million per year. NDR's tax rate is 40%, and the market value is V=E=$12 million. The stock has a beta of 1.0, and the risk free rate is 9%. [Assume that E(Rm)- Rf = 6%]. Management is considering the use of debt; debt would be issued and used to buy back stock, and the size of the firm would remain constant. The default free interest rate...

Unlev Inc., an unlevered firm, has perpetual expected earnings before interest and taxes of $6.6 million...

Unlev Inc., an unlevered firm, has perpetual expected earnings before interest and taxes of $6.6 million per year, a tax rate of 34.00% and a beta of 1.5. The risk-free rate is 3.75% and the market risk-premium is 5.50%. Management is considering buying some of its stock back through an issue of debt. The firm will be issuing 5,280 bonds at a coupon rate of 7.00%. The face value of a bond = $1,000. The bonds will be offered at...

Question