Q2. Company B earned $20 million before interest and taxes on revenues of $60 million last year....

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Finance

Q2. Company B earned$20 million before interest and taxes on revenues of $60 millionlast year. Investment in fixed capital was $12 million, anddepreciation was $8 million. Working capital investment was $3million. The company expects earnings before interest and taxes(EBIT), investment in fixed and working capital, depreciation, andsales to grow at 12% per year for the next five years. After fiveyears, the growth in sales, EBIT, and working capital investmentwill decline to a stable 4% per year, and investments in fixedcapital and depreciation will offset each other. The companyâ€™s taxrate is 20%. Suppose that the weighted average cost of capital is12% during the high growth stage and 8% during the stable stage.The calculation of FCFF in year 1 through year 5 is shown in thefollowing table:
Year
0
1
2
3
4
5
6
Sales
60.00
EBIT
20
EBIT(1-T)
16
Depreciation
8
CAPEX
12
Change in working capital
3
FCFF
Finish the table and use WACC model tocalculate the value of the company.(please show the details)(50points)

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3.6 Ratings (564 Votes)

FCFF EBIT1 tax rate Depreciation investments inworking capital investments in fixed capitalFrom year 6 and beyond investments in fixed capital anddepreciation will offset each other So in FCFF calculation sameamount of depreciation and same amount of investments See Answer

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Year	0	1	2	3	4	5	6
Sales	60.00
EBIT	20
EBIT(1-T)	16
Depreciation	8
CAPEX	12
Change in working capital	3
FCFF