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Enterprise value / value of equity

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At the end of 2006, Blue Light, Inc. has net debt of $740 million and forecasts its cash flows (in
millions) as:
2007 2008 2009
Cash flow from operations $1,400 $1,500 $1,750
Cash investment $1,000 $1,100 $1,300

The free cash flow will grow at a rate of 5% per year after 2009, and the required rate of return is
10%. Calculate (a) the firm's enterprise value and (b) the value of the equity at the end of 2006.

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Solution Preview

The enterprise value is the present value of free cash flows
Free cash flows = Cash flow from operations - cash investment
The free cash flow for the various years is
2007 = 1,400-1,000=400
2008 = 1,500-1,100=400
2009 = ...

Solution Summary

The solution explains how to calculate the enterprise value and the value of equity.