Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 20% of the company’s present value, and you believe that at this capital structure the company’s debt holders will demand a return of 8% and stockholders will require 11%.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 20% of the company’s present value, and you believe that at this capital structure the company’s debt holders will demand a return of 8% and stockholders will require 11%. The company is forecasting that next year’s operating cash flow (depreciation plus profit after tax at 21%) will be $58 million and that investment in plant and net working capital will be $20 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year.

 

a. What is the total value of Icarus?

b. What is the value of the company’s equity?

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