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DCF Calculation

Below you find the 2021 balance sheet of Abana Inc. and forecasts for the 2022 and 2023 balance sheets and income statements. (All values are book values.) Abana's cost of equity capital is 12%, its cost of debt is 8%, the tax rate is 30%, and the target leverage (D/(D+E)) is constant at 20% in the long run (i.e., after 2023). Assume that all cash flows are received at the end of each year. Current and forecast balance sheets of Abana (in million ) Forecast income statements of Abana (in million ) a) Calculate the expected unlevered free cash flows of Abana for the years 2022 and 2023 ( 8 points) b) Assume that the 2023 unlevered free cash flow continues to grow with a nominal rate of 4% and inflation is expected to be 2% for all years to come. What is the firm value of Abana on January 11t,2022 ? ( 6 points) APV or WACC? If you are not able to calculate the free cash flows in a), you can use 300 and 450 for 2022 and 2023, respectively. Note that these may not be the correct values! c) What percentage of your estimate in b) depends on your forecast for the time after 2023? What could you do to make your estimate less dependent on the distant future? (2 points) d) What is the value of Abana's equity on January 1st,2024 ? First, compute the market value of equity for Abana on January 1st,2024 based on DCF-WACC, i.e., your previous calculations. Then, calculate the flows to equity from January 2024 on to estimate Abanas equity value on January 1st,2024. Do the two procedures result in the same or in different values in the given case? Why? FTE: net debt Remember that by January 1st,2024, Abana will have reached its target leverage level. (6 points)

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