Question

Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 21% of the company’s present value, and you believe that at this capital structure the company’s debt holders will demand a return of 7% and stockholders will require 14%. The company is forecasting that next year’s operating cash flow (depreciation plus profit after tax at 40%) will be $59 million and that investment in plant and net working capital will be $21 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year. a. What is the total value of Icarus? (Do not round intermediate calculations. Enter your answer in millions rounded to the nearest whole dollar amount.)

Answer 1

Answer:

Icarus total value: 478,459,899

Explanation:

We will calcualte the WACC to know the cost of capital for the company:

$WACC = K_e(\frac{E}{E+D}) + K_d(1-t)(\frac{D}{E+D})$

Ke 0.14

Equity weight 0.79

Kd 0.07

Debt Weight 0.21

t 0.4

$WACC = 0.14(0.79) + 0.07(1-0.4)(0.21)$

WACC 11.94200%

Now we calcualte the value of the company:

$\frac{FCF}{return-growth} = Intrinsic \: Value$

59,000,000

(21,000,000)

38,000,000 Free Cash flow ofthe Firm

$\frac{38,000,000}{0.11942-0.04} = Intrinsic \: Value$

$\frac{38,000,000}{0,07942} = Intrinsic \: Value$

Value: 478.468.899