Question : The ABC's earnings before interest taxes (EBIT) was $1,000,000 and depreciation was $200,000 in the year just ended, and it expects that these will grow by 10% per year indefinitely. To make this happen, the company will have to invest an amount equal to 25% of pretax cash flow (i.e., EBIT + Depreciation) each year. The tax rate is 40%. The appropriate required rate of return on the unleveraged cash flow is 12% per year (i.e., cost of capital ka = .12), and the company currently has debt of $10 million outstanding. Ignore ABC's interest expenses, change in debts, and change in net working capital.
(a) Given ABC's next year EBIT of $1,100,000 and interest expenses of $0, the taxable income will also be $1,100,000. Given the tax rate of 40%, what will be the income taxes in the coming year?
(b) Given ABC's next year EBIT of $1,100,000, depreciation of $220,000 and taxes computed in part (1), what is the operating cash flow (OCF) in the coming year?
(c) Given ABC's next year EBIT of $1,100,000 and depreciation of $220,000, its capital expenditure will be $330,000. What is the free cash flow for the firm (FCFF) in the coming year if ?NWC is zero?
(d) Compute the intrinsic value of the firm using the free cash flow approach.
(e) Given the firm value computed in part (4) and the value of debt outstanding of $10 million, compute ABC's equity value.
(f) If there are 5 million shares of common stocks outstanding, what is the stock price per share?