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18 December, 06:04

Victoria Enterprises expects earnings before interest and taxes (EBIT ) next year of $ 1.3 million. Its depreciation and capital expenditures will both be $ 309 comma 000 , and it expects its capital expenditures to always equal its depreciation. Its working capital will increase by $ 53 comma 000 over the next year. Its tax rate is 35 %. If its WACC is 10 % and its FCFs are expected to increase at 6 % per year in perpetuity, what is its enterprise value?

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  1. 18 December, 08:58
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    Enterprise value = $20.988 million

    Explanation:

    We calculate the FCFF first using the given information.

    FCFF from EBIT = EBIT * (1 - Tax rate) + Depreciation - Working Capital increase - Capital expenditure

    Thus, the FCFF for Victoria Enterprises is:

    FCFF = 1.3 million * (1 - 0.35) + 0.309 million - 0.053 million - 0.309 million FCFF = 0.792 million

    Using the FCFF we calculate the firm value using constant growth model as,

    Value = 0.792 * (1 + 0.06) / 0.10 - 0.06 = $20.988 million
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