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Q2. Company B earned $20 million before interest and taxes on revenues of $60 million last year....

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Finance

Q2. Company B earned$20 million before interest and taxes on revenues of $60 millionlast year. Investment in fixed capital was $12 million, anddepreciation was $8 million. Working capital investment was $3million. The company expects earnings before interest and taxes(EBIT), investment in fixed and working capital, depreciation, andsales to grow at 12% per year for the next five years. After fiveyears, the growth in sales, EBIT, and working capital investmentwill decline to a stable 4% per year, and investments in fixedcapital and depreciation will offset each other. The company’s taxrate is 20%. Suppose that the weighted average cost of capital is12% during the high growth stage and 8% during the stable stage.The calculation of FCFF in year 1 through year 5 is shown in thefollowing table:

Year

0

1

2

3

4

5

6

Sales

60.00

EBIT

20

EBIT(1-T)

16

Depreciation

8

CAPEX

12

Change in working capital

3

FCFF

Finish the table and use WACC model tocalculate the value of the company.(please show the details)(50points)

Answer & Explanation Solved by verified expert
3.6 Ratings (564 Votes)
FCFF EBIT1 tax rate Depreciation investments inworking capital investments in fixed capitalFrom year 6 and beyond investments in fixed capital anddepreciation will offset each other So in FCFF calculation sameamount of depreciation and same amount of investments    See Answer
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