Current Free cash flows to the firm = C0 = EBIT x (1 - T) + Depreciation - Increase in working capital - Capital expenditure = 100 x (1 - 40%) + 10 - (20 - 10) - 20 = $ 40 million
Expected free cash flow = C1 = C0 x (1 + g) = 40 x (1 + 1%) = $ 40.40 mn
D/E = 1; hence Wd = D / (D + E) = 1 / (1 + 1) = 0.5 and We = 1 - Wd = 1 - 0.5 = 0.5
WACC = r = Wd x Kd x (1 - T) + We x Ke = 0.5 x 5% x (1 - 40%) + 0.5 x 17% = 10%
Hence, value of the operations = C1 / (r - g) = 40.40 / (10% - 1%) = $ 448.89 million
Equity value = Value of the operations - Net debt = 448.89 - 250 = $ 198.89 million
The fair value of the share = Equity value / N = 198.89 / 100 =
$ 1.9889 = $ 1.99 / share
CBT has reported EBIT of $100mn this year. Its total capital expenditure is $20mn and depreciation...
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