Free Cash Inc. is anticipated to make earnings before interest and taxes (EBIT) of $30,000, $40,000, and $50,000 in each of the next three years. Depreciation is estimated to be $3,000, $3,500, and $4,000 in each of the next three years. Capital expenditures are estimated to be $8,000, $9,000, and $10,000 in each of the next three years. Incremental increases in working capital requirements are estimated to be $2,500, $3,000, and $3,500 in each of the next three years. Free Cash Inc.’s tax rate is 35 percent.
A. Free Cash Inc.’s cost of capital is estimated to be 9 percent. Free cash flows beyond year 3 are estimated to grow at an annual rate of 4 percent. Using this information and that provided in Part A, apply the growing perpetuity formula to estimate the terminal value of Free Cash Inc. as of year 3.
B. Free Cash Inc.’s cost of capital is estimated to be 9 percent. Free cash flows beyond year 3 are estimated to grow at an annual rate of 4 percent. Using this information and that provided in Part A, apply the growing perpetuity formula to estimate the terminal value of Free Cash Inc. as of year 3.
C. Free Cash Inc.’s current value of existing debt is $58,996. Using this information and that provided in Parts A and B, estimate the value of the equity of Free Cash Inc. by applying the free cash flow to the firm method.
D. Estimate Free Cash Inc.’s year 3 terminal value by applying an EV/EBITDA multiple of 8.5 times to year 3 EBITDA.