Question

To start, you will need to pick the CFFA for a subject firm. Specifically, pick such that . For this question, you will form an estimate of value for the following privately-held firm that is up for sale. Assume: • The firm’s financing structure is 100% debt. The firm’s cost of debt is 12% annually and it is not assumable. • The firm’s CFFA grow at a constant annual rate of 3%. • Like-kind firms are trading at $50,000,000 with CFFA ranging between $3,000,000 and $5,000,000 with constant growth of 4% in their CFFA. • There is strong demand for firms of this type in the marketplace, i.e. assume the highest and best use principal applies. What is an estimate of the value of the firm?

Answer 1

we use the following formula to calculate the value of the firm.

Value = [ CFFA * ( 1+ growth rate) ] / (WACC - growth rate)

Since, the firm's financing structure is 100% debt, there is no equity and no cost of equity.

Hence, WACC = cost of debt = 12%

growth rate = 3%

CFFA = Cash flow from assets of the firm

Taking Apple Inc.,

Value = (52,380 * 1.03) / (0.12-0.03) = USD599,460millions

we can similarly calculate the value of any firm of which we have the cffa.