Finance Assignment | Professional Writing

5. Your job is to estimate the market value of equity for the following company. To accomplish this task, you have collected the following information. The estimated free cash flows for each of the next five years are as follows. Subsequent to year 5, you estimate that operating cash flows will grow at 3.5 % indefinitely. Currently, the company has debt outstanding $4 million and interest expense $ 0.2 million. We assume firm’s debt is permanent. You estimate the required return on the levered equity is 16%. The company’s current debt-to-firm value ratio is 20%. Assume the company’s tax rate is 30% which will remain for the foreseeable future.

Using the adjusted present value method (APV) compute the value of the firm if it were unlevered, the value of interest tax shields, and the overall levered firm value. If the company has 0.75 million shares outstanding, what is the current market price per share? Company’s Projected Operating Cash Flow ($ thousands) 1 2 3 4 5 EBIT Tax on EBIT $1,860 $2,410 $3,140 409530.691 $3,820 840 $4,610 1,014 2,980 EBIT(1-4) Add back depreciation Less capital expenditures Less AWC 1,451 500 400 (200) 1,880 600 800 (275) 2,449 500 600 200 450 500 3,596 475 600 250 300 – FCFF $1,751 $1,955 $2,149 $2,630 $3,221

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