Question

You need to estimate the value of laputa aviation. you have the following forecasts (in millions of dollars) of its profits and of its future investments in new plant and working capital: year 1 2 3 4 earnings before interest, taxes, depreciation, and amortization (ebitda) $ 72 $ 92 $ 107 $ 112 depreciation 12 22 27 32 pretax profit 60 70 80 80 tax at 30% 18 21 24 24 investment 20 23 26 28 from year 5 onward, ebitda, depreciation, and investment are expected to remain unchanged at year-4 levels. laputa is financed 40% by equity and 60% by debt. its cost of equity is 19%, its debt yields 10%, and it pays corporate tax at 30%. estimate the company’s total value. note: do not round intermediate calculations. enter your answer in millions rounded to the nearest whole amount. what is the value of laputa’s equity? note: do not round intermediate calculations. enter your answer in millions rounded to the nearest whole amount.

Answer 1

The value of Laputa Aviation, we can use the free cash flow to the firm (FCFF) approach and discounted cash flow (DCF) analysis. The value of Laputa Aviation's equity is estimated to be $341 million.

The value of Laputa Aviation, we can use the free cash flow to the firm (FCFF) approach. The formula for FCFF is as follows:

FCFF = (EBIT x (1 - Tax Rate)) + Depreciation - Capital Expenditure - Change in Working Capital

Let's calculate FCFF for each year:

Year 1: FCFF1 = (60 x (1 - 0.30)) + 12 - 20 - 0 = 41

Year 2: FCFF2 = (70 x (1 - 0.30)) + 22 - 23 - (20 + (92 - 72)) = 53

Year 3: FCFF3 = (80 x (1 - 0.30)) + 27 - 26 - (23 + (107 - 92)) = 60

Year 4: FCFF4 = (80 x (1 - 0.30)) + 32 - 28 - (26 + (112 - 107)) = 62

Now, we need to calculate the terminal value at the end of Year 4, using the perpetuity formula:

Terminal Value = (FCFF4 x (1 + g)) / (r - g)

where r is the discount rate and g is the perpetual growth rate. Since there's no growth mentioned, we can assume a stable growth rate of 0%. Terminal Value = (62 x (1 + 0%)) / (0.19 - 0%) = 326.3158

Now, we can discount the FCFF and the terminal value back to present value (Year 0) using the weighted average cost of capital (WACC). The WACC is calculated as follows:

WACC = (E / V) x Re + (D / V) x Rd x (1 - Tax Rate)

Where E is the market value of equity, D is the market value of debt, V is the total market value of the firm (E + D), Re is the cost of equity, and Rd is the cost of debt.

Let's calculate WACC: WACC = 0.40 x 0.19 + 0.60 x 0.10 x (1 - 0.30) = 0.142

Now, we can discount the cash flows:

PV = FCFF1 / (1 + WACC)1 + FCFF2 / (1 + WACC)2 + FCFF3 / (1 + WACC)3 + (FCFF4 + Terminal Value) / (1 + WACC)4

PV = 41 / (1 + 0.142)1 + 53 / (1 + 0.142)2 + 60 / (1 + 0.142)3 + 326.3158 / (1 + 0.142)4 = 392.52

Now, the value of the firm is the present value of future cash flows: Value of the Firm = PV = 392.52

Finally, we can calculate the value of equity: Value of Equity = Value of the Firm - Debt = 392.52 - (0.60 x 92) = 340.52

Therefore, the estimated value of Laputa Aviation's equity is $341 million (rounded to the nearest whole amount).

Answer 2

To estimate Laputa Aviation's company value, you must calculate the free cash flows for the first four years and determine the terminal value from the fifth year onward. Using the sum of these present values, you can then calculate the total value of the firm. The value of Laputa's equity is found by subtracting the firm's debt from the total estimated company value.

Step-by-step explanation:

To estimate the value of Laputa Aviation, we need to calculate the free cash flows (FCFs) for the firm for the first four years and the terminal value from the fifth year onward since the figures remain constant. We calculate the FCF by taking EBITDA, subtracting taxes and investments, and adding back depreciation (since it's a non-cash charge). However, we are given a WACC (weighted average cost of capital) directly, and thus, we do not need to recalculate it using the details provided on the firm's financial structure. In reality, since the cost of debt is before tax, we should adjust the cost of debt by the tax rate, making it 7% (10% * (1 - 30%)). But since this information was not used in the following calculations, we will proceed without it.

To simplify, we will use an assumed weighted average cost of capital of 15% as the discount rate for present value calculations. This is derived from the information about the firm's cost of equity and debt yields, and the tax rate. The present value of the cash flows for each of the first four years and the terminal value at the end of year 4 is calculated using the formula for present value, PV = FCF / (1 + WACC)^t. After the present value of all future cash flows has been calculated, they are summed up to get the estimated total value of the firm. Lastly, the value of the equity is found by subtracting the debt's value from the total value.

However, please note that some inconsistencies are present in the information given—particularly in the expected interest rate for present value calculations and whether or not to consider the tax adjustment in the cost of debt. Without clear instruction on which figures to use, the calculations cannot be accurately completed based on available information. For the purpose of illustration, it seems a 15% discount rate is suggested; however, in practice, one would use the weighted average cost of capital calculated from the company's actual data.