Question

The following data is for the coming year. FinCorp's Net Income is reported as $195 million. Depreciation Expense is $20 million, accounts receivable decreased by $20 million, accounts payable decreased by $10 million, and inventories increased by $10 million. The firm's interest expense is $22 million. Assume the tax rate is 35% and the net debt of the firm increases by $3 million. What is the market value of equity if the FCFE is projected to grow at 3% indefinitely and the cost of equity is 11%?

Answer 1

Net Income = $195 million

Depreciation Expense = $20 million

Decrease in Accounts receivable = $20 million

Decrease in accounts payable = $10 million,

Increase in inventories = $10 million

Increase in Net debt = $3 million

Increase/Decrease in working capital = Increase in inventory + Decrease in Account payable - Decrease in Account Receivables

= $10 milliion + $10 million - $20 million

= $0 million

Free Cashflow for equity calculation

Net Income $195 million

Add: Depreciation $20 million

Less: Capital expenditure ($0 million)

Less: Increase in working capital ($0 million)

Add: Increase in Net debt $3 million

Free Cash flow for Equity (FCFE) $218 million

Given FCFE growth rate (g) = 3%

Cost if equity (RE) = 11%

Market value of equity (VE) = FCFE / Re - g

Market value of equity = 218 million / 0.11 - 0.03

Market value of equity = 218 million / 0.08

Market value of equity = $2,725 million