Total value of Icarus Airlines
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Ircarus 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 30 percent of the company's present value, and you believe that at this capital structure the company's debtholders will demand a return of 6 percent and stockholders will require 11 percent. The company is forecasting that next year's operating cash flow (depreciation plus profit after tax at 40 percent) will be $68 million and that investment expenditures will be 30 million. Thereafter, operating cash flows and investment expenditures are forecast to grow by 4 percent a year.
A. What is the total value of Icarus?
B. What is the value of the company's equity?
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Solution Summary
The solution solves the equity question below.
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First we need to calculate the company's WACC
WACC = .3*6%*(1-.4)+.7*11%
=> WACC = 1.08 + 7.7 = 8.78%
Next year cash flow is ...
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