Hong Kong Water Company is a beverage company that reported the following numbers (in $millions) for the

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Question:

Hong Kong Water Company is a beverage company that reported the following numbers (in
$millions) for the most recent fiscal year:

Revenues $3,000
EBITDA $650
DA $150
EBIT $500
Taxes $150
Net Income $350
Payout $175

During the year, the company reported capital expenditures of $250 million and an increase in non-cash working capital of $40 million. You can assume that its effective tax rate is the marginal tax rate. Assume that we know the following:
• The company’s FCF will grow at 8% per year for the next five years.
• The company’s current cost of capital is 12%, which will stay at that level for the next 5 years.
• The company maintains a stable dividend policy, i.e., its payout ratio stays the same for all future years.
• At the end of year 5, the company is expected to become a mature business, facing a cost of capital of 8% (mature company levels). It will also maintain a constant debt-to-equity ratio, and conduct no external equity financing.
• At the end of year 5, the company is expected to have an ROE of 4%, and an ROA of 3%.

(A) What is the FCF at year 3?

(B) Estimate the company’s terminal value at the end of year 5 from future FCFs (in millions)

(C) Estimate the value of equity per share today (accurate to a certain range). You are given the following information:
• The total debt outstanding is $1 billion
• The company’s cash balance is $600 million and there are 150 million shares outstanding.