Likeway has $15m in revenue $1m in EBIT in 2014. The non-cash net working capital as of 31 December 2014 was $3m. The company expects to pay $80,000 in taxes and it sits at the 10% income tax bracket. Revenues are expected to grow at 5% in 2015. Suppose that net working capital is a stable function of revenue and EBIT to revenue margin remains constant. There is no CAPEX or deprecation.

 Necessary

1. Estimate the free cash flow to firm (FCF) in 2015

2. Suppose that Likeway’s FCF will grow by 2% from 2015 to 2016 and remain at 2% perpetually. Currently, Greenway’s cost of equity is 10%, cost of debt is 6%. It expects to maintain a constant debt to equity ratio of 0.6. What is the value of Greenway’s equity at the end of 2014?

Answer rating: 100% (QA)

1 To estimate the free cash flow to the firm FCF in 2015 we need to calculate the operating cash flo... View the full answer