Question

Diebold Incorporated

Diebold Incorporated manufactures, markets, and services automated teller machines in the United States. The following are selected numbers from the financial statements for Year 1 and Year 2 (in millions):

Year 1             Year 2

Revenues                                                          $ 544.0           $ 620.0

Operating Expenses (465.1)             (528.5)

Depreciation                                                          (12.5)              (14.0)

= Earnings before Interest and Taxes 66.4                 77.5

Interest Expenses                                                     0.0                   0.0

Taxes                                                                  (25.3)              (29.5)

= Net Income                                                    $ 41.1           $   48.0

Working Capital                                                $ 175.0           $ 240.0

The firm had capital expenditures of $15 million in Year 1 and $18 million in Year 2. The working capital in Year 0 was $180 million. In Year 3 and into the future, the firm expects $40 million in free cash flows. Its WACC is 7.5 percent and expected growth rate is 2.5 percent.

What is the market value of equity? Explain any assumptions.

Answer 1

market value of equity = present value of Year 1 and Year 2 free cash flows + terminal value at end of Year 2

free cash flow in Year 1 and 2 = net income + depreciation - change in working capital - capital expenditure

terminal value at end of Year 2 = Year 3 free cash flow / (WACC - growth rate)

present value = future value / (1 + WACC)^{number of years}