Question

Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 33% of the company's present value, and you believe that at this capital structure the company's debt holders will demand a return of 7% and stockholders will require 14%. The company is forecasting that next year's operating cash flow (depreciation plus profit after tax at 21%) will be $71 million and that investment in plant and net working capital will be $33 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year. a. What is the total value of Icarus? b. What is the value of the company's equity? (For all the requirements, do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.) a. Total value million b. Company's equity million

Answer 1

Answer:-

Total Value = $527.4 Million

Company's Equity = $353.4 Million

Explanation:-

a) WACC = weight of debt * cost of debt x (4- Tax Rate) + [weight of equity x cost of equity] 0.33 x 78% *(1-21-1-2] + [11-0.33) x 14°-] (0.33 x 0.07 x 0.79) + (0.67x0.14). 0.018249 + 0.0936 0.112049 11:2049974 Free Cash flow = Operating cash flow – Net working capital $71 Million $33 Million $38 Million Value Icarus Ahrlines - free cash flow (WALL-growth Rate ) 2 $38 Millim (11.2049-% - 40%) $38 Milu'm 7. 2049% $527.41884 Millim. $ 527,4 Millims css with Cammet

b) company's Equity a value of company Value of Debt $527.41884 po.33 x $527.41884) 2 $ 527.41884 $174.0482172 $ 353, 3706 228 on $353.4 Million CS Scanned with CamScanner