From the following data, calculate the total market value of the firm. Earnings before interest = $0.1 million, D = $0.2 million, interest on debt = 10% p.a., cost of equity capital = 20%, the dividend payout ratio = 0.5, and assume no taxes
Earnings before interest = $0.1 million, D = $0.2 million, interest on debt = 10% p.a., cost of equity capital = 20%, the dividend payout ratio = 0.5, and assume no taxes
Value of the firm = OFCF ÷(k−g)
where:OFCF=operating free cash flow
k=discount rate, in this case WACC ( weighted average cost of capital )
g=expected growth rate in OFCF
g=RR×ROIC
where:
RR=average retention rate, or (1 - dividend payout ratio) = (1- 0.5) = 0.5 = 50%
Return on the invested capital ROIC=EBIT(1−tax)÷total capital
Tax = 0
Total Capital not mentioned here
Equity Capital is Not mentioned here. Assuming Equity Capital same as debt = then Equity Capital = $0.2 million
ROIC = 0.1 / 0.2+0.2= 25%
g = RR X ROIC = 50% X 25% = 12.5%
K = WACC = WACC is given by the formula (Weight of Debt x Rate of Debt ) + (Weight of Equity X Rate of Equity )
= 50% * 10%. + 50% * 20% = 15% =
so k as stated above is 15%
Taking EBIT as Operating Cash flow ( as no other information is given ) = $ 0.1 m ( as given above )
Value of the firm = OFCF÷(k−g) = $ 0.1 / ( 15% - 12.5%) = $ 4 million ( answer )
From the following data, calculate the total market value of the firm. Earnings before interest =...
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