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Icarus Airlines is proposing to go public, and you have been given the task of estimating...

Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 31% of the company’s present value, and you believe that at this capital structure the company’s debt holders will demand a return of 5% and stockholders will require 12%. The company is forecasting that next year’s operating cash flow (depreciation plus profit after tax at 21%) will be $69 million and that investment in plant and net working capital will be $31 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year.

a. What is the total value of Icarus?

b. What is the value of the company’s equity?

(For all the requirements, do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)

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Answer #1

a)The value of the firm is $693 millions. b)The value of equity is $478.17 million. 3 Given data ó- i) cost of debt (ka) = 1% cost o equity (Re) = 12% Capital structure Debt 31% Equity (100% -31%) = 69% W(d) / Step 3: Call of value of firm it is given that cash flow will grow in perpetuity at 14% accordingly value of the firm is equa

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