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Assume again that last year Brock had an EBIT of $1600, Depreciation of 600, capital expenditures...

Assume again that last year Brock had an EBIT of $1600, Depreciation of 600, capital expenditures of 700, operating NWC of 1000 and a tax rate of .25. However, Allan’s management believes that Brock will grow at 18% for the next 3 years, and at a constant rate of 5% thereafter. Recompute the value of Brock, assuming that its WACC will remain 10%.

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Expert Solution

Given:

Last year EBIT = $1600

               Tax = 25%*1600 = 400

               Net Income = $1200

Operating cash flow = Net Income + Depreciation + Operating NWC

Operating cash flow = 1200 + 600 + 1000

Operating cash flow = 2800

Free cash flow = Operating cash flow - Capital expenditure

Free cash flow = 2800 - 700

Free cash flow = $2100

Value of Brock = FCF1 / (1 + r) + FCF2 / ( 1+ r)2 + FCF3 / ( 1+ r)3 + HV / ( 1+ r)3

FCF last year is $2100 it will grow 18% for next 3 years and then by 5% indefinitiely

Year 1 = 2100 * 1.18 = $2478

Year 2 = 2478 * 1.18 = $2924.04

Year 3 = 2924.04 * 1.18 = $3450.367

Horizon value of Brock at year 3, when the growth gets constant

Horizon Value 3 = FCF3 * ( 1+ g) / ( k - g)

Horizon Value 3 = 3450.367 * (1+ 0.05) / ( 0.10 - 0.05)

Horizon Value 3 = 72457.71

Putting it in the above equation

Value = 2478 / 1.10 + 2924.04 / 1.10^2 + 3450.367 / 1.10^3 + 72457.71 / 1.10^3

Value = 2252.727 + 2416.562 + 2592.312 + 54438.55

Value = $61700.15

Value of Brock will be $ 61700.15

jeff jeffy answered 1 year ago
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