The firm Value Driver, Inc. has reported Revenues of $250 million in the year 2021. An equity analyst following the firm has projected the following information for the years 2022-2026:

Expected growth in revenues: 20%

Gross profit margin (EBIT/Sales): 50%

Marginal corporate tax rate: 40%

Net investments in fixed assets (% of NOPAT): 50%

Investments in operating NWC (% of NOPAT): 30%

Value Driver, Inc. has excess cash on the balance sheet equal to $80 million and the market value of its debt equals $300 million. The firm's invested capital at the end of 2021 equals $360 million. Value Driver Inc., has 15 million shares outstanding and its cost of capital equals 15%. 

With this information answer the following three questions:

(i)  Determine the projected Free Cash Flows for Value Driver, Inc. for the years 2022-2026, based on the analyst's forecasts.

(ii) Determine the firm's ROIC and Economic Profit for the year 2022. Based on your assessment of the firm's profitability, is the firm generating economic value?

(iii)  If the analyst assumes that the firm will grow indefinitely at a constant rate of 5% after the year 2026 with no change in profitability, what is the value of the firm and the equity value per share based on the analyst's forecasts?

(iv)  Based on the projections for the next 5 years, and the growth assumptions after 2026 in the previous question, project Value Driver Inc.'s Economic Profit for the years 2022-2026 and show that the value of the firm equals the sum of the Invested Capital as of the end of the year 2021 plus the PV of the future Economic Profits.

Answer rating: 100% (QA)

SOLUTION i To determine the projected free cash flows for Value Driver Inc for the years 20222026 we need to calculate the following Projected revenues for each year Year 2022 250 million x 120 300 mi... View the full answer