Part 1 Johnson Transformers Inc. Following is the seven-year forecast for a new venture called Johnson...

Part 1

Johnson Transformers Inc. Following is the seven-year forecast for a new venture called Johnson Transformers: (all amounts in $000) 2020 2021 2022 2023 2024 2025 2026 EBIT $(1000) $(900) $200 $1,200 $2,500 $3000 $3,050 Capital Expenditures $550 $350 $200 $175 $175 $160 $150 Changes in Working Capital $400 $300 $200 $100 $100 ($100) ($100) Depreciation $40 $80 $125 $150 $150 $150 $150 Beginning after year 2026 the annual growth in EBIT is expected to be 1.5%, a rate that is projected to be constant over Johnson Transformers remaining life as an enterprise. Beginning in 2026 Johnson's Transformers capital expenditures and depreciation are expected to offset each other (capex - depreciation = 0) and year to year changes in working capital are expected to be zero (working capital levels remain constant year over year). For discounting purposes consider 2020 as year 1. Assume a tax rate is 21% and a cost of capital of 7.75% Question 1: Determine the NPV of Johnson Transformers Free Cash Flow for the years 2020 -2026. HINT: Remember to account for loss carry-forwards when determining income taxes. The answer to this question was determined in Excel. Your answer may deviate slightly depending upon differences in truncation and rounding. Answers below are in $000.

Part 2

Calculate the fair market value (NPV) for Johnson Transformers. For this problem assume that the Net Present Value of Johnson Transformers free cash flow for the period 2020 - 2026 is $3000 (NOTE its not $3000 but make this assumption in case the answer you determined in the first question was incorrect. Assume no underlying changes to any of the data in the problem. DO NOT USE YOUR ANSWER FROM THE QUESTION ABOVE. All ANSWERS ARE IN $000

Expert Solution


	Free Cash Flow=EBIT-Taxes+Depreciation -Capital Expenditure-Change in working capital

	Present Value (PV) of Cash Flow:
	(Cash Flow)/((1+i)^N)
	i=Discount Rate=Cost of Capital=7.75%=		0.0775
	N=Year of Cash Flow
		2020	2021	2022	2023	2024	2025	2026
N	Year	1	2	3	4	5	6	7
A	Earning Before taxes and Interest (EBIT)	($1,000)	($900)	$200	$1,200	$2,500	$3,000	$3,050
X	Earning for tax purpose with Losses Carried forward	($1,000)	($1,900)	($1,700)	($500)	$2,000	$3,000	$3,050
B	Taxes (21%)	$0	$0	$0	$0	$420	$630	$641
C	Depreciation	$40	$80	$125	$150	$150	$150	$150
D	Capital Expenditures	$550	$350	$200	$175	$175	$160	$150
E	Change in working capital	$400	$300	$200	$100	$100	($100)	($100)
FCF=A-B+C-D-E	Free Cash Flow	($1,910)	($1,470)	($75)	$1,075	$1,955	$2,460	$2,509.50	SUM
PV	Present Value (PV) of Free Cash Flow:	-$1,773	-$1,266	-$60	$798	$1,346	$1,572	$1,488	$2,104.99
NPV=Sum of PV	NPV of Free Cash Flow 2020-2026	$2,104.99

b	Fair Market Value:
	EBIT in 2027=3050*1.015=	$3,095.75
	Free cash Flow in 2027 =3095.75+Depreciation -Capital Expenditure-Change in working capital
	Free cash Flow in 2027 =	$3,095.75
	Growth Rate of FCF =1.5%=	0.015
	Horizon value in2026=3095.75/(0.0775-0.015)
	Horizon value in2026=	$49,532
	Present Value of Horizon value	$29,374.12	(49532/(1.0775^7)
	NPV for Free cash Flow2020-2026	$3,000
	Fair Market Value:(29374.12+3000)=	$32,374.12

jeff jeffy answered 1 year ago

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