Question

Victoria Enterprises expects earnings before interest and taxes (EBIT) next year of $1 million. Its depreciation and capital expenditures will both be $300,000, and it expects its capital expenditures to always equal its depreciation. Its working capital will increase by $50,000 over the next year. Its tax rate is 25%. If its WACC is 10% and its FCFs are expected to increase at 4% per year in perpetuity, what is its enterprise value

Answer 1

$9,166,666.67

Step-by-step explanation:

The computation of the enterprise value is given below

But before that next year free cash flow is

= (Earnings before interest and taxes (EBIT) × (1 - tax rate) ) +depreciation -capital expenditures - working capital

=$1,000,000 × (1 - 40%)) +$300,000 - $300,000 - $50,000

= $550,000

Now the enterprise value is

= Free cash flow ÷ (WACC - growth rate)

= $550,000 ÷ (10% - 4%)

= $9,166,666.67