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: $ $ 124 $ Earnings before interest, taxes, depreciation, and amortization (EBITDA) Depreciation Pretax profit Tax at 40% Investment Year 1 2 3 4 $ 89 $ 109 293944 49 60 70 80 80 24 28 32 32 18 21 24 26 From year 5 onward, EBITDA, depreciation, and investment are expected to remain unchanged at year-4 levels. Laputa is financed 60% by equity and 40% by debt. Its cost of equity is 20%, its debt yields 6%, 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.) Answer is complete but not entirely correct. Total value S 593 million b. What is the value of Laputa's equity? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Laputa's equity million

Answer 1

Year	1	2	3	4
EBITDA	89	109	124	129
Depreciation	29	39	44	49
Pre-tax profit	60	70	80	80
Less :Tax @40%	24	28	32	32
Net income	36	42	48	48
Investment	18	21	24	26
FCFF = Net income + Depreciation - Investment	47	60	68	71
Source	Post tax cost	Weightage to total capital	Post tax cost x Weight
Debt	6%*(1-40%)=3.60%	40.00%	3.60%*40.00 = 1.44%
Equity	20.00%	60.00%	20.00%*60.00% = 12.00%
WACC = 1.44% + 12.00%
WACC = 13.44%
Formula	=47/(1+13.44%)^1	=60/(1+13.44%)^2	=68/(1+13.44%)^3	=71/(1+13.44%)^4
PV of FCF	41.43	46.62	46.58	42.87
Total PV of FCF	177.51
	Formula	Result
Terminal value	=71/13.44%	528.27
PV of FCF	=528.27/((1+13.44%)^4)	319.00
Enterprise value = PV of Terminal value + PV of FCF	=319+177.51	496.51
Total value = 496.51 million
Equity value = Total value - Debt value - cash
*Debt value and cash is provided, Hence we can break the total value as per the equity and debt proportion
Equity value = Total value * 60%
Equity value = 496.51* 60%
Equity value = 297.91