Page 277 - AFM Integrated Workbook STUDENT S18-J19

Business valuation

Question 1

Nadal Co’s revenue was $250 million in the most recent accounting period.
This is expected to grow at 5% per year for the next three years, and then stay
constant into perpetuity. The operating profit margin is expected to be 8% next
year and then 10% per year thereafter.

Historically the amount of replacement non-current asset investment has been
equal to depreciation and this is expected to continue. Annual incremental non-
current asset investment is expected to be $4 million per year for the next three
years, before falling to zero. Annual incremental working capital investment
over the next three years is expected to be 25% of the increase in revenue.

The company pays tax at a rate of 20%, and has a weighted average cost of
capital of 7%. It owns short-term investments with a market value of $15 million
and is partly funded by debt finance with a market value of $56 million.

Required:

Calculate the value of the company’s equity, using the free cash flow to
firm method.

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