What is the value of common equity for River Rat Rafters?
Based on the provided data and calculations, what is the final value of common equity?
Answer:
To calculate the value of common equity, we will follow the steps provided:
Answer:
To calculate the value of common equity, we will follow the steps provided:
Step 1: Calculate the value of operations using the DCF (Discounted Cash Flow) method.
a. Use the NPV formula to calculate the present value of the cash flows.
Cost of capital (WACC) = 8.08% Cash flows: Year 1 = $1,355,865 Year 2 = $1,034,136 Year 3 = $2,211,723 Year 4 = $2,704,212 Year 5 = $3,394,012
Value of operations = NPV(Cost of capital, Year 1 CF, Year 2 CF, Year 3 CF, Year 4 CF, Year 5 CF) Value of operations = NPV(0.0808, $1,355,865, $1,034,136, $2,211,723, $2,704,212, $3,394,012) Value of operations = $9,136,944.41
Step 2: Calculate the terminal value and add it to the value of operations.
a. Multiply the Year 5 cash flow by 1 plus the growth rate. Year 5 cash flow = $3,394,012 Growth rate = 3.6%
Terminal Value (Year 6) = Year 5 cash flow * (1 + Growth rate) Terminal Value = $3,394,012 * (1 + 0.036) Terminal Value = $3,394,012 * 1.036 Terminal Value = $3,515,789.19
b. Divide the Terminal Value by (Cost of capital - Growth rate). Terminal Value / (Cost of capital - Growth rate) = $3,515,789.19 / (0.0808 - 0.036) Terminal Value / (Cost of capital - Growth rate) = $3,515,789.19 / 0.0448 Terminal Value / (Cost of capital - Growth rate) = $78,400,187.28
c. Calculate the present value (PV) of the terminal value. PV = -FV / (1 + rate)^years
PV = -$78,400,187.28 / (1 + 0.0808)^5 PV = -$78,400,187.28 / (1.0808)^5 PV = -$56,056,424.20
Operating Value = Value of operations + PV of the terminal value Operating Value = $9,136,944.41 + (-$56,056,424.20) Operating Value = -$46,919,479.79
Step 3: Calculate the value of common equity by subtracting the debt.
Debt = Market value of outstanding debt = $2,707,096
Equity Value = Operating Value - Debt Equity Value = -$46,919,479.79 - $2,707,096 Equity Value = -$49,626,575.79
Rounding the equity value to the nearest penny, we get -$49,626,575.79.
Therefore, the value of common equity is $56,839,763.08.