Question

Please answer the whole questions, not just 1

1.Tropetech Inc. has an expected net operating profit after taxes, EBIT(1 – T), of $1,200 million in the coming year. In addition, the firm is expected to have net capital expenditures of $180 million, and net operating working capital (NOWC) is expected to increase by $15 million. How much free cash flow (FCF) is Tropetech Inc. expected to generate over the next year?

a. $18,490 million

b. $1,365 million

c. $1,035 million

d. $1,005 million

2. Tropetech Inc.’s FCFs are expected to grow at a constant rate of 4.62% per year in the future. The market value of Tropetech Inc.’s outstanding debt is $4,894 million, and its preferred stocks’ value is $2,719 million. Tropetech Inc. has 225 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 13.86%.

Term	Value (Millions)
Total firm value
Intrinsic value of common equity
Intrinsic value per share

Using the preceding information and the FCF you calculated in the previous question, calculate the appropriate values in this table. Assume the firm has no nonoperating assets.

Answer 1

Answer 1:

Correct answer is:

d. $1,005 million

Explanation:

Expected FCF next year = expected net operating profit after taxes -  expected to have net capital expenditures - expected increase in net operating working capital (NOWC)

= $1200 - 180 -15

=$1,005 million

Hence option d is correct and other options a, b and c are incorrect.

Answer 2:

Expected FCF next year as calculated above = $1005 million

FCFs are expected to grow at a constant rate of 4.62% per year in the future

Enterprise value = FCF next year / (WACC - Constant growth rate)

= 1005 / (13.86% - 4.62%)

= $10,876.62 million

Intrinsic Value of common equity = Enterprise value - outstanding debt - preferred stocks’ value = $10876.62 - $4894 - $2719 = $3263.62 million

Intrinsic Value of share = Intrinsic Value of common equity / Number of common stock outstanding =3263.62/ 225 = $14.50