Question

6. Goog company has an EBIT*(1-tax) of $9,737, a depreciation of $1,851, change of NOW of $381, and a capital expenditure of $3,438. The growth rate of free cash flow is expected to be 17.68% for next two years. The beta of the firm is 1.19, the target capital structure of the firm is 6% debt 94% equity, the cost of debt is 3%, the tax rate is 40%, the market risk premium is 8% and the risk free rate is 1%. Given a comparable Price to Ebitda ratio of 14.15 and a market value of debt of $4,200, what is firm’s equity value using DCF approach?

Answer 1

$20,772.12

Step-by-step explanation:

For computing the firm equity value using DCF analysis, first we need to do the following calculations which are shown below:

Required rate of return = Risk free rate of return + Beta × market risk premium

= 1% + 1.19 × 8%

= 10.52%

Now the WACC is

= Weight of equity × Cost of equity + Weight of debt × cost of equity × (1 - tax rate)

= 94% × 10.52% + 6% × 3% × (1 - 40%)

= 10%

Now the Free cash flow is

= Net income + depreciation expense - change in non working capital - change in capital expenditure

= $9,737 + $1,851 - $381 - $3,438

= $7,769

Now the enterprise value is

= $7,769 + {$7,769 + (1 + 17.68) ÷ (1 + 10%)} + (1 + 17.68)^2 ÷ (1 + 10%)^2

= $24,972.12

So the firm equity value is

= Equity - debt

= $24,972.12 - $4,200

= $20,772.12