Ask Question
16 April, 11:15

Victoria Enterprises expects earnings before interest and taxes (EBIT) next year of $2.4 million.

Its depreciation and capital expenditures will both be $288,000, and it expects its capital expenditures to always equal its depreciation.

its working capital will increase by $45,000 over the next year.

Its tax rate is 40%.

If its WACC is 11% and its FCFs are expected to increase at 4% per year in perpetuity, what is its enterprise value?

+2
Answers (1)
  1. 16 April, 13:12
    0
    Value of Victoria Enterprises = $19928571

    Explanation:

    There are various methods of valuing businesses such as, earnings based valuation, asset based valuation and discounted cash-flow valuation. The data given in the question pretty much imply that Victoria Enterprises uses a discounted cash-flow based valuation method. Under DCF method, the value of an entity is derived by estimating the future annual after-tax cash flows discounted at an appropriate cost of capital.

    So first of all we need to determine cash flows from earnings before interest and taxes given in the question. In order to do that we have to follow a format to calculating cash flows as follows:

    Cash flows: After tax earnings + non-cash items - cash items.

    After tax earnings = subtract taxes from EBIT

    non-cash items = i. e depreciation = 288000: 2 = $144000

    Cash items = i. e capital expenditures and working capital changes

    Cash flows = ($2.4 * 1-0.40) + $144000 - $144000 - $45000

    Cash flows for year 1 = 1440000 + $144000 - $144000 - $45000

    Cash flows for year 1 = $1395000

    Now we calculate value of enterprise by incorporating growth rate and converting CF1 into perpetuity as follows:

    The formula = CF1 / (wacc - g)

    CF1 = cash flows for year 1

    g = growth rate

    Value of Victoria Enterprises = $1395000 / (0.11-0.04)

    Value of Victoria Enterprises = $19928571
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Victoria Enterprises expects earnings before interest and taxes (EBIT) next year of $2.4 million. Its depreciation and capital expenditures ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers