Anyone has done this question? This is about determining the WC and FC from I/S and BS. I don’t quite get one of the answer… What is the expected growth rate in FCFF that Carson must have used to generate his valuation of $1.08 billion? A) 7%. B) 12%. C) 5%. -------------------------------------------------------------------------------- Click for Answer and Explanation Since Firm Value = FCFF1 / (WACC − g), we first need to determine FCFF1, which is FCFF in 2006: FCFF = NI + NCC + [Int × (1 - tax rate)] – FCInv – WCInv = 16.9 + 80 + [34 × (1 - .35)] – [(480-240) - (400-160) + 80] – [(55 - 70) - (50 - 50)] = 16.9 + 80 + 22.1 – 80 – (-15) = 54 Firm Value = FCFF1 / (WACC - g) 1080 = 54 / (0.12 − x) [(1080)(0.12)] – 1080x = 54 129.6 – 1080x = 54 75.6 = 1080x 0.07 = x The expected growth rate in FCFF that Carson must have used is 7%. Question: Why FCInv = [(480-240) - (400-160) + 80]? where does the “80” come from? Thanks in advance!
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wierd. It looks like depreciation?
I attempted to post before but seeing here has some problems in presenting tabular figures which make it quite difficult to read … anyway here you are … Thanks. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Burcar-Eckhardt, a firm specializing in value investments, has been approached by the management of Overhaul Trucking, Inc., to explore the possibility of taking the firm private via a management buyout. Overhaul’s stock has stumbled recently, in large part due to a sudden increase in oil prices. Management considers this an opportune time to take the company private. Burcar would be a minority investor in a group of friendly buyers. Jaimie Carson, CFA, is a private equity portfolio manager with Burcar. He has been asked by Thelma Eckhardt, CFA, one of the firm’s founding partners, to take a look at Overhaul and come up with a strategy for valuing the firm. After analyzing Overhaul’s financial statements as of the most recent fiscal year-end (presented below), he determines that a valuation using Free Cash Flow to Equity (FCFE) is most appropriate. Overhaul Trucking, Inc. Income Statement April 30, 2005 (Millions of dollars) 2005 2006E Sales 300.0 320.0 Gross Profit 200.0 190.0 SG&A 50.0 50.0 Depreciation 70.0 80.0 EBIT 80.0 60.0 Interest Expense 30.0 34.0 Taxes (at 35 percent) 17.5 9.1 Net Income 32.5 16.9 Overhaul Trucking, Inc. Balance Sheet April 30, 2005 (Millions of dollars) 2005 2006E Cash 10.0 15.0 Current Assets 50.0 55.0 Gross Property, Plant & Equip. 400.0 480.0 Accumulated Depreciation (160.0) (240.0) Total Assets 300.0 310.0 Accounts Payable 50.0 70.0 Long-Term Debt 140.0 113.1 Common Stock 80.0 80.0 Retained Earnings 30.0 46.9 Total Liabilities & Equity 300.0 310.0 Eckhardt agrees with Carson’s choice of valuation method, but her concern is Overhaul’s debt ratio. Considerably higher than the industry average, Eckhardt worries that the firm’s heavy leverage poses a risk to equity investors. Overhaul Trucking uses a weighted average cost of capital of 12% for capital budgeting, and Eckhardt wonders if that’s realistic. Eckhardt asks Carson to do a valuation of Overhaul in a high-growth scenario to see if optimistic estimates of the firm’s near-term growth rate can justify the required return to equity. For the high-growth scenario, she asks him to start with his 2006 estimate of FCFE, grow it at 30% per year for three years and then decrease the growth rate in FCFE in equal increments for another three years until it hits the long-run growth rate of 3% in 2012. Eckhardt tells Carson that the returns to equity Burcar-Eckhardt would require are 20% until the completion of the high-growth phase, 15% during the three years of declining growth, and 10 percent thereafter. Eckhardt wants to know what Burcar could afford to pay for a 15% stake in Overhaul in this high-growth scenario. Carson assembles a few spreadsheets and tells Eckhardt, “We could make a bid of just under $16 million for the stake in Overhaul if the high-growth scenario plays out.” Eckhardt worries, though, that the value of their bid is extremely sensitive to the assumption for terminal growth, since in that scenario, the terminal value of the firm accounts for slightly more than two-thirds of the total value. Carson agrees, and proposes doing a valuation under a “sustained growth” scenario. His estimates show Overhaul growing FCFE by the following amounts: Growth in FCFE 2007 40.0% 2008 15.7% 2009 8.6% 2010 9.1% 2011 8.3% In this scenario, he would project sustained growth of 6% per year in 2012 and beyond. With the more stable growth pattern in cash flow, Eckhardt and Carson agree that the required return to equity could be cut to a more moderate 12%. Carson also decides to try valuing the firm on Free Cash Flow to the Firm (FCFF) using this same 12% required return. Using a single-stage model on the estimated 2006 figures presented in the financial statements above, he comes up with a valuation of $1.08 billion.
80 is the depreciation in 2006E.
oh~ sorry. just misread the expression. why not simply 480 - 400 to get FCInv !!!
bcos there could be sale of FC. Which will reduce the Amount of FCInv. So (Change in Gross) - (Change in Acc. Depr) is the right way to get the FCInv.
Because the PP&E numbers given are gross numbers.