Question

P 10-2 (similar to) : Question Help Victoria Enterprises expects earnings before interest and taxes (EBIT) next year of $2.1 million. Its depreciation and capital expenditures will both be $287,000, and it expects its capital expenditures to always equal its depreciation. Its working capital will increase by $54,000 over the next year. Its tax rate is 40%. If its WACC is 8% and its FCFs are expected to increase at 5% per year in perpetuity, what is its enterprise value? The company's enterprise value i ound to the nearest dollar.)

Answer 1

The formula for calculating the enterprise is as given below:

EV= FCF*(1 + g)/r – g

Where:

FCF is the free cash flow to the firm

R is the required rate of return

g is the growth rate

FCF is calculated using the below formula:

FCF= EBIT*(1 – tax rate) + depreciation – working capital – capital expenditure

       = 2,100,000(1 – 0.40) + 143,500 + 54,000 – 143,500

       = 1,260,000 + 143,500 + 54,000 – 143,500

       = 1,314,000.

Since the depreciation and capital expenditure both amount to $287,000. So, it will amount to $143,500 for each account.

EV= $1,314,000*(1 + 0.05)/ 0.08 – 0.05

     = $1,379,700/ 0.04

     = $34,492,500

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