Question

Spirialtex Inc., announced aggressive growth plans over the next three years. Below are the expected investments in fixed and working capital and corresponding pro forma income statements for each of the next 3 years.

Year	1	2	3
Tax Rate	40%	40%	40%
Capital Expenditures	20	30	40
Change in NWC	5	6	7
Shares Outstanding	6	6	6
Sales (000,000)	150	200	250
COGS	75	100	125
Sales & Administrative Expense	15	20	25
Depreciation & Amortization	50	51	52
Total Operating Costs	140	171	202
Operating Income (EBIT)	10	29	48
Earnings Before Taxes	6	24	42
Taxes	2.4	9.6	16.8
Net Income	3.6	14.4	25.2
EPS	0.6	2.4	4.2

Spirialtex has a corporate cost of capital of 12% and is expected to have a long run growth rate of 4%. What is the horizon value of the firm?

Group of answer choices

$439.40

$309.40

$211.50

$177.11

$125.00

Answer 1

Horizon value of firm will start at the end of year 3.

Free Cash flow from Firm(FCFF) = EBIT(1-Tax rate) + Depreciation- Change in Net Working Capital - Net Capital Spending

FCFF for year 3 = 48*(1-0.40) + 52 - 7 - 40

= $33.80

Calculating Horizon Value at the end of year 3:-

$Horizon Value = \frac{FCFF_3(1+g)}{(WACC-g)}$

where, FCFF3 = $33.80

g = Long-term growth rate = 4%

WACC = cost of capital = 12%

$Horizon Value = \frac{33.80(1+0.04)}{(0.12-0.04)}$

Horizon Value of Firm is $439.40

Option 1

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