Question

You need to estimate the value of Laputa Aviation. You have the following forecasts (in millions of dollars) of its profits and of its future investments in new plant and working capital:

	Year
		1			2			3			4
Earnings before interest, taxes, depreciation, and amortization (EBITDA)	$	74		$	94		$	109		$	114
Depreciation		24			34			39			44
Pretax profit		50			60			70			70
Tax at 40%		20			24			28			28
Investment		18			21			24			26

From year 5 onward, EBITDA, depreciation, and investment are expected to remain unchanged at year-4 levels. Laputa is financed 50% by equity and 50% by debt. Its cost of equity is 17%, its debt yields 8%, and it pays corporate tax at 40%.

a. Estimate the company’s total value. (Do not round intermediate calculations. Enter your answer in millions rounded to the nearest whole amount.)

b. What is the value of Laputa’s equity? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)

Answer 1

011 x r for =+D9/2 D11 : A B co PVIF @ 10.9% Present value 2 FCF1 $ 54 0.902 $ 49 3 FCF2 $ 70 0.813 $ 57 4 FCF3 $ 81 0.733 $ 59 5 FCF4 $ 86 0.661 $ 57 6 Firm value year 4 $ 789 0.661 $ 522 86/10.9% 7 Company's total value $ 743 10 11 Value of Laputa's equity $ 371.73

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