Victoria Enterprises expects earnings before interest and taxes (EBIT) next year of $2.4 million.

Its depreciation and capital expenditures will both be $288,000, and it expects its capital expenditures to always equal its depreciation.

its working capital will increase by $45,000 over the next year.

Its tax rate is 40%.

If its WACC is 11% and its FCFs are expected to increase at 4% per year in perpetuity, what is its enterprise value?

Value of Victoria Enterprises = $19928571

Explanation:

There are various methods of valuing businesses such as, earnings based valuation, asset based valuation and discounted cash-flow valuation. The data given in the question pretty much imply that Victoria Enterprises uses a discounted cash-flow based valuation method. Under DCF method, the value of an entity is derived by estimating the future annual after-tax cash flows discounted at an appropriate cost of capital.

So first of all we need to determine cash flows from earnings before interest and taxes given in the question. In order to do that we have to follow a format to calculating cash flows as follows:

Cash flows: After tax earnings + non-cash items - cash items.

After tax earnings = subtract taxes from EBIT

non-cash items = i. e depreciation = 288000: 2 = $144000

Cash items = i. e capital expenditures and working capital changes

Cash flows = ($2.4 * 1-0.40) + $144000 - $144000 - $45000

Cash flows for year 1 = 1440000 + $144000 - $144000 - $45000

Cash flows for year 1 = $1395000

Now we calculate value of enterprise by incorporating growth rate and converting CF1 into perpetuity as follows:

The formula = CF1 / (wacc - g)

CF1 = cash flows for year 1

g = growth rate

Value of Victoria Enterprises = $1395000 / (0.11-0.04)

Value of Victoria Enterprises = $19928571