Question

The owner of Big Boy flea market, lewis redding, passed away on december 30 2009. His 100% ownership interest in BBFM became part of his estate, on which his heirs must pay estate taxes. The IRS has hired a valuation expert, who has submitted a report stating that the business was worth approximately $20 million at the time of Mr. Redding's death. Mr. Redding's heirs believe the IRS valuation is too high and have hired you to perform a separate valuation analysis in hopes of supporting their position.

a.) Estimate the firm free cash flows for 2010-2014, where the firms tax rate is 25%. capital expenditures are assumed to equal depreciation expense, and there are no changes in net working capital over the period.

Answer 1

To estimate Big Boy flea market's firm free cash flows from 2010 to 2014, deduct the tax rate of 25% from the EBITDA, as capital expenditures are equal to depreciation and there is no change in working capital. As the figures for EBITDA are not provided, actual calculations cannot be performed. Accurate estimation requires historical and projected earnings data.

Step-by-step explanation:

To estimate the firm free cash flows for 2010-2014 for the Big Boy flea market (BBFM) for estate tax purposes, we must follow a standard approach that accounts for the specifics of the case. Assuming the firm’s tax rate is 25%, capital expenditures equal depreciation expense, and there are no changes in net working capital, we follow these steps:

Begin by calculating the operating income before depreciation (EBITDA). Next, deduct taxes to get the net operating income. Since capital expenditures are assumed to equal depreciation, and there is no change in net working capital, these do not impact the free cash flow. Hence, the post-tax operating income is the free cash flow available to the firm.

The formula to calculate free cash flow (FCF) is: FCF = EBITDA – (EBITDA * Tax Rate).

Note that without actual numbers for EBITDA, the calculation of free cash flows cannot be completed. To provide an accurate valuation, historical data and projections for the company’s earnings would be essential.