EBIT, TARGET DEBT %, TAX RATES- to compute Value of Firm, Equity Value

CFA Level II Equities
#1

Please suggest/advise/discuss on the following:

In an exam question, the details provided are:

Company’s EBIT FOR 5 YEARS,

Tax Rate for 5 years

Cost of Debt (5%)

Weighted Average Capital Cost (12%)

Target Debt % (10%)

Debt’s Market Value 35 Million

Yearly Capex amount for 5 years

Yearly Depreciation amount for 5 years

annual change in working capital data for 5 years

2 Scinarios were given.

In scenario 1, there is no assumption.

In scenario 2, there is an assumption that from 4th year Capex will increase by 20%.

The Examiner asked the candidate to compute:

Value of the Business? (in both scenarios separately)

Value of Equity?

FCFF for Year 0 (zero) ?

Fellow friends/students/qualified- have you come across similar example or exercise in any textbook/ study notes.

#2

The data is incomplete.

To calculate the value of the firm and value of equity, you need to calculate FCFF. The data is missing.

Bring to present the FCFF stream with wacc rate in order to calculate value of the firm. Then, substract the value of debt and you will have value of equity.

#3

Thanks for the Reply Mr Harrogath, I am unable to recollect all the question input data sorry dor that. But could you advise on - In which book/webpage similar kind of problems/questions are being provided

#4

In the book of equity valuation, cash flows chapter. I don’t have the books anymore unfortunately.

#5

You need to learn all possible derivatives of FCFF formula and FCFE here is an example

FCFF = NI + NCC + Int(1 – Tax rate) – FCInv – WCInv FCFF = CFO + Int(1 – Tax rate) – FCInv FCFF= EBIT*(1-t) +D&A- FCInv – WCInv