Reference no: EM132891297
Shanty Corp is considering the purchase of 100% of the common equity of PenApp, a young growing company. We know the following:
Year 1, 2, and 3 Respectively:
Revenues: 20, 30, 40m
Cash OpEx: 17, 25, 32m
Depreciation (non cash): 1, 1.5, 2m
Increase In Working Cpaital: .5, 1.5, 1.5
CapEx: 1, 1, 2.0
Corprate Income Tax Rate: 30% all years
Debt Principal Repayment, 0.0, 0.5, 1.0
Interest Expense on Total Debt: 0.0, 0.8, 0.6
Facts:
PenApp Cost of Capital = 20%
PenApp Cost of Debt = 7%
PenAp Constant debt to equity ratio in the future will be 20%
Shanty Corp will sell the equity of PenApp for 45m at the end of year 3.
Problem 1: What Is the Free Cash Flow to Equity in EACH YEAR. Bic will sell the equity of PenApp at the end of Year 3 for 45m (that is the Terminal Value)
Problem 2: What should we pay for the equity of PenApp? Show Calculations.
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