Reference no: EM132408204

Lockheed Corporation, one of the largest defense contractors in the United States, reported EBITDA of $1,290 million in 1993, prior to interest expenses of $215 million and depreciation charges of $400 million. Capital expenditures in 1993 amounted to $450 million, and working capital was 7% of revenues (which were $13,500 million). The firm had debt outstanding of $3.068 billion (in book value terms), trading at a market value of $3.2 billion and yielding a pretax interest rate of 8%. There were 62 million shares outstanding, trading at $64 per share, and the most recent beta was 1.10. The tax rate for the firm was 40%. (The Treasury bond rate was 7%, and the risk premium was 5.5%.)

The firm expected revenues, earnings, capital expenditures and depreciation to grow at 9.5% a year from 1994 to 1998, after which the growth rate was expected to drop to 4%. (Capital spending will be 120% of depreciation in the steady state period.) The company also planned to lower its debt/equity ratio to 50% for the steady state (which will result in the pretax interest rate dropping to 7.5%).

a. Estimate the value of the firm.

b. Estimate the value of the equity in the firm, and the value per share.