Suppose we are the beginning of 2022, and you have the following information on firm XYZ. -
Question:
Suppose we are the beginning of 2022, and you have the following information on firm XYZ.
- Sales in 2021 = $1600
- Estimated sales growth is projected to be 5% in 2022 and 2023
- Costs of goods sold (COGS) excluding depreciation = 70% of sales
- Net working capital = 80 in 2021 and is expected to remain the same fraction of sales in the future
- Net Plant Property and Equipment (PPE) in 2021 = $200
- Capital Expenditure are projected to be 30 and 35 in 2022 and 2023 respectively
- The company uses a linear depreciation rate of 10% (applicable to previous year PPE)
- After 2023, the free cash flow is expected to grow in perpetuity at 3% per year
In addition, corporate tax rate = 35%. XYZ’s equity beta is 1.2 and the average debt beta is zero. The risk free rate is 4% and the market risk premium is 5%
A) Forecast the free cash flow for 2022 and 2023 based on the information provided.
B) Assume the company expects to maintains a target leverage ratio of 25%. Estimate its Weighted Average Cost of Capital (WACC). Calculate the present value (as of beginning of 2022) of the terminal value of the free cash flows
C) Calculate the present value (as of the beginning of 2022) of the intermediate cashflows (that is the present value of the cashflows from 2022 and 2023). Calculate firm value.
Fundamentals Of Corporate Finance
ISBN: 9780135811603
5th Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford