Question

QUESTION 47 Standard, Inc. reported EBIT of $42.00 million for last year. Depreciation expense totaled $20 million and capital expenditures came to $7 million. The company increased net working capital by $2 million. Free cash flow is expected to grow at a rate of 6.10% for the foreseeable future. Standard faces a 40% tax rate and has a 0.40 debt to equity ratio with $200 million (market value) in debt outstanding. Standard's equity beta is 1.24, the risk-free rate is currently 5% and the market risk premium is estimated to be 6%. What is the current total value of Standard, Inc. (in millions)? What is the current value (in millions) of Standard's equity?

Answer 1

Equity Value = $634.72 mn

Step-by-step explanation:

Given Data:

Market value in debt outstanding = $200 million

Depreciation expense totaled = $20 million

capital expenditures = $7 million

Free cash flow rate = 6.10%

Standard's equity beta = 1.24

Risk-free rate = 5%

Market risk premium = 6%

The current value of standard equity is calculated using the formula;

Equity Value = Firm Value - Market Value of Debt---------1

But,

Firm Value = FCFF*(1+g)/(r-g) ------------------------2

FCFF = EBIT(1-t) + Depreciation - Capital Expenses - Changes in NWC. -------3

FCFF = 42*0.6 + 20 - 7 - 5

= $33.2 mn

Putting the value obtained from equation 3 into equation 2, we have;

Firm Value = FCFF*(1+g)/(r-g)

Firm Value = 33.2 x (1.061)/(0.1032 - 0.061)

= $834.72 mn

Putting the value obtained from equation 2 into equation 1, we have;

Equity Value = Firm Value - Market Value of Debt

= 834.72 - 200

= $634.72 mn