Question

We find the following information on NPNG (No-Pain-No-Gain) Inc. (18 marks total)

• EBIT = $2,000,000
• Depreciation = $250,000
• Change in net working capital = $100,000
• Net capital spending = $300,000

These numbers are projected to increase at the following supernormal rates for the next three years, and 5% after the third year for the foreseeable future:

• EBIT: 10%
• Depreciation: 15%
• Change in net working capital: 20%
• Net capital spending: 15%

The firm’s tax rate is 35%, and it has 1,000,000 outstanding shares and $6,000,000 in debt. We have estimated the WACC to be 15%.

e. Calculate the firm’s value at time 0 using the WACC of the firm as the discount rate. (Note that the first CFA* to be discounted is the cash flow from one year into the future.)   

f.   Calculate the firm’s equity value at time 0.

g. Calculate the firm’s share price at time 0.

Answer 1

Given

EBIT = $2,000,000

Depreciation = $250,000

Change in net working capital = $100,000

Net capital spending = $ 300,000

Firms tax rate = 35%

WACC = 15%

1. Firm's value at time 0

EBITDA * (1 - tax rate) + depreciation * (1 - tax rate) - change in net working capital - net capital spending

EBITDA = $2,000,000 + $250,000 = $2,250,000

applying in the FCFF formula = $2,250,000 * (1 - 0.35) + $250,000 * (1 - 0.35) - $ 100,000 - $300,000

$2,250,000 * 0.65 + $250,000 * 0.65 - $ 100,000 - $300,000

$1,462,500 + $162,500 - $100,000 - $300,000 = $1,225,000

value of firm = FCFF discounted by WACC

= $1,225,000/(1+0.15) = $1,065,217