Question

Golden Eye Co., a hi-tech satellite company, has asked you to value the company for possible cross-listing in the U.S. The company has estimated revenues, earnings before interest and taxes, change in net working capital, and Net Capital spending (defined as Capital spending – depreciation) for the next three years (see Exhibit 1 below.) The free cash flow in year 4 is estimated to be $250 million and is expected to grow at 4% forever. The tax rate is 36%. The company’s unlevered cost of capital is 16.43%. Golden Eye Co. has just borrowed $1 billion of long-term debt at 9% interest rate. It will repay $200 million per year in the first three years, and then will maintain the debt at $400 million forever. What is the value of the firm?
Exhibit 1:
Year T=1 T=2 T=3
Revenues 6,619 7,417 8,564
EBIT 540 680 750
Net Capital spending 150 170 190
Change in NWC 70 75 80

Answer 1

Answer:

Explanation:

Let's first determine the free cash flow of the firm

Particulars                            Years

                          1                         2                   3

EBIT                  540                   680                750

Tax at 36%    (0.36*540)       (0.36*680)        (0.36*750)    

Less:               345.6                  435.2            480

Net Capital -

Spending            150                   170                 190

Change in NWC    70                    75                  80      

Less:                    125.6              190.2                210

The terminal value at the end of T =(3  years) is:

$= \dfrac{Free \ cash \ flow}{unlevered \ cost - expected \ growth \ rate}$

$= \dfrac{250}{0.1643-0.04}$

$= \dfrac{250}{0.1243}$

= 2011.26

Finally, the value of the firm can be computed as follows:

Years                  Free Cash Flow        PVIF           PV

1                          125.6                        0.6589        107.88

2                         190.2                        0.7377         140.31

3                          210                           0.6336       133.06

Terminal Value  2011.26                    0.6336        1294.33    

Value of the firm   ⇒                                               $1655.58