Value of the firm |
$15,061,500 |
Value of the firm's equity |
$12,061,500 |
Value of Firms Equity using free cash flow approach
Particulars |
Amount ($) |
Cash flow from operations before interest and taxes [$1,500,000 x 105%] |
1,575,000 |
Less: Depreciation Expenses [$210,000 x 105%] |
220,500 |
Taxable Income |
1,354,500 |
Less: Tax at 21% [$1,354,500 x 21%] |
284,445 |
After-tax unleveraged income |
1,070,055 |
Add Back: Depreciation Expenses |
220,500 |
Net Income after tax |
1,290,555 |
Less: Additional Investment [$1,575,000 x 15%] |
236,250 |
Free Cash Flow (FCF) |
1,054,305 |
Total Value of the firm
Free Cash Flow (FCF) = $1,054,305
Growth Rate per year (g) = 5.00% per year
Required Rate of Return (Ke) = 12.00% per year
Total Value of the firm = Free cash flow / (market capitalization rate – Growth Rate)
= FCF / (Ke – g)
= $1,054,305 / (0.12 – 0.05)
= $1,054,305 / 0.07
= $15,061,500
Value the firm’s Equity
Value the firm’s Equity = Total Value of the firm – Market Value of Debt
= $15,061,500 - $3,000,000
= $12,061,500
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