In 2015, ABC increased its working capital by $30,000 and had earnings after tax of $275,000. In addition, it spent $45,000 on machine replacement. It expects the after-tax earnings to grow by 10% in 2016 and investment in working capital and CAPEX to be $35,000 and $50,000 respectively.
(i). What is the free cash flow to equity in 2016?
(ii). If the cost of equity is 12% and ABC expects the free cash flow to equity in 2016 to remain flat perpetually, what is the value for the equity of ABC?
Sample Solution
