# The momi corporation’s cash flow from operations before interest and taxes was $1.9 million in the

###### Question:

## Answers

firm value 20,850,000

equity value 15,850,000

Explanation:

firm value = Fre Cash Flow Firm discounted at the WACC

Similar to the gordon model but using the Free Cash Flow of the Firm instead of dividends:

[tex]\frac{FFCF_1}{WACC-growth} = Intrinsic \: Value[/tex]

WACC = 12%

growth = 5%

FFCF1 would be the next Free Cash Flow of the Firm

EBIT - Income Tax + Depreciation - Working Capital Investment = Free Cash Flow Firm

Working Capital Investment: 19% of ebit

1,900,000 x 19% = 361,000

Depreciation 250,000

income tax 21% of ebit = 399,000

1,900,000 - 361,000 - 399,000 + 250,000 = 1,390,000 Current Year

FFCF x (1+g) = FFCF1 = 1,390,000 x 1.05 = 1,459,500

Now we calculate the firm value

1,459,500/(0.12-0.05) = 20,850,000

If the firm has 5,000,000 debt then their equity is:

equity value = firm value – market value of debt

20,850,000 - 5,000,000 = 15,850,000

firm value 20,850,000

equity value 15,850,000

Explanation:

firm value = Fre Cash Flow Firm discounted at the WACC

Similar to the gordon model but using the Free Cash Flow of the Firm instead of dividends:

[tex]\frac{FFCF_1}{WACC-growth} = Intrinsic \: Value[/tex]

WACC = 12%

growth = 5%

FFCF1 would be the next Free Cash Flow of the Firm

EBIT - Income Tax + Depreciation - Working Capital Investment = Free Cash Flow Firm

Working Capital Investment: 19% of ebit

1,900,000 x 19% = 361,000

Depreciation 250,000

income tax 21% of ebit = 399,000

1,900,000 - 361,000 - 399,000 + 250,000 = 1,390,000 Current Year

FFCF x (1+g) = FFCF1 = 1,390,000 x 1.05 = 1,459,500

Now we calculate the firm value

1,459,500/(0.12-0.05) = 20,850,000

If the firm has 5,000,000 debt then their equity is:

equity value = firm value – market value of debt

20,850,000 - 5,000,000 = 15,850,000