Question

Colt Systems will have EBIT this coming year of $ 34 million. It will also spend $ 9 million on total capital expenditures and increases in net working​ capital, and have $ 5 million in depreciation expenses. Colt is currently an​ all-equity firm with a corporate tax rate of 25 % and a cost of capital of 12 %

a. If​ Colt's free cash flows are expected to grow by 10.6 % per​ year, what is the market value of its equity​ today?
If​ Colt's free cash flows are expected to grow by10.6 %per​ year, the market value is ____-million. ​ (Round to two decimal​ places.)

Answer 1

The market value of Colt Systems' equity today is $102 million, calculated using the formula for present value of free cash flows.

Step-by-step explanation:

The market value of Colt Systems' equity today is $102 million. This can be calculated by using the formula for calculating the present value of free cash flows, which takes into account the expected growth rate of the cash flows and the cost of capital.

In this case, the free cash flows are expected to grow at a rate of 10.6% per year, and the cost of capital is 12%. By discounting the future cash flows to their present value, we can determine the market value of the equity.

To calculate the market value of the equity, we can use the following formula:

Market Value of Equity = Free Cash Flow / (Cost of Capital - Expected Growth Rate)

Plugging in the given values, we get:

Market Value of Equity = $34 million / (0.12 - 0.106) = $102 million