19 Feb Burton anticipates that efficiency gains can be im
Burton anticipates that efficiency gains can be implemented that will allow Flowmaster to reduce its needs for net working capital. Currently, Flowmaster has net working capital equal to 30% of anticipated revenues for year 1. He estimates that, for year 1, the firm’s net working capital can be reduced to 25% of year 2 revenues, then 20% of revenues for all subsequent years. Estimated net working capital for years 1 through 3 is as follows:To sustain the firm’s expected revenue growth, Burton estimates that annual capital expenditures that equal the firm’s annual depreciation expense will be required.Burton has been thinking for some time about whether to use Howden’s corporate cost of capital of 9% to value Flowmaster and has come to the conclusion that an independent estimate should be made. To make the estimate, he collected the following information on the betas and leverage ratios for three publicly traded firms with manufacturing operations that are very similar to Flowmaster’s:1. Calculate the unlevered cash flows (i.e., the firm FCFs for Flowmaster for years 1 to 3).2. Calculate the unlevered cost of equity capital for Flowmaster. The risk-free rate of interest is 4.5% and the market risk premium is estimated to be 6%.a) Get the unlevered beta using Hamada’s equation,ßU=b) Among the Take an average weighted by their revenue3. Calculate the value of Flowmaster’s unlevered business.a) Estimate the value of unleveled cash flow.
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