To calculate the Free Cash Flow to the Firm (FCFF) for HBM Corp and the subsequent values, we will proceed through each step methodically.
Step 1: Calculate FCFF for the Current Year
The formula to calculate FCFF is as follows:
\[ FCFF = EBIT(1 - Tax \ Rate) + Depreciation - Capital \ Expenditures - Change \ in \ NWC \]
Where:
- EBIT = Revenue - COGS - Operating Expenses - Depreciation
1. Calculate EBIT (Earnings Before Interest and Taxes):
\[ EBIT = Revenue - COGS - Operating \ Expenses \]
Substituting the values:
\[ EBIT = R500,000,000 - R300,000,000 - R50,000,000 = R150,000,000 \]
2. Calculate tax on EBIT:
\[ Tax = EBIT \times Tax \ Rate = R150,000,000 \times 0.30 = R45,000,000 \]
3. Calculate (1 - Tax Rate):
\[ 1 - Tax \ Rate = 1 - 0.30 = 0.70 \]
4. Calculate FCFF:
\[ FCFF = EBIT \times (1 - Tax \ Rate) + Depreciation - Capital \ Expenditures - Change \ in \ NWC \]
Substituting the values:
\[ FCFF = R150,000,000 \times 0.70 + R15,000,000 - R20,000,000 - R5,000,000 \]
\[ FCFF = R105,000,000 + R15,000,000 - R20,000,000 - R5,000,000 \]
\[ FCFF = R105,000,000 + R15,000,000 - R25,000,000 = R95,000,000 \]
Thus, the Free Cash Flow to the Firm (FCFF) for the current year is R95,000,000.
Step 2: Project FCFF for the Next 5 Years
We will need to calculate the FCFF for the next 5 years based on given growth rates.
Yearly Calculations:
-
Revenue for Year 1 to Year 5: \[ Revenue_{t} = Revenue_{0} \times (1 + g_{R})^t \]
-
COGS and Operating Expenses Growth: \[ COGS_{t} = COGS_{0} \times (1 + g_{COGS})^t \]
\[ Operating\ Expenses_{t} = Operating\ Expenses_{0} \times (1 + g_{OE})^t \]
-
Capital Expenditures Growth: \[ Capital\ Expenditures_{t} = Capital\ Expenditures_{0} \times (1 + g_{CapEx})^t \]
-
Change in NWC Growth: \[ Change\ in\ NWC_{t} = Change\ in\ NWC_{0} \times (1 + g_{NWC})^t \]
Where:
- \( g_{R} = 0.06 \) (Revenue Growth Rate)
- \( g_{COGS} = g_{OE} = 0.05 \) (COGS and Operating Expenses Growth Rate)
- \( g_{CapEx} = 0.04 \) (Capital Expenditures Growth Rate)
- \( g_{NWC} = 0.05 \) (Change in NWC Growth Rate)
We will calculate all components necessary for FCFF for each year.
Calculations for Each Year:
| Year | Revenue | COGS | Operating Expenses | EBIT | Tax | FCFF | |------|--------------|-------------|--------------------|--------------|--------------|---------------| | 0 | 500,000,000 | 300,000,000 | 50,000,000 | 150,000,000 | 45,000,000 | 95,000,000 | | 1 | 530,000,000 | 315,000,000 | 52,500,000 | 162,500,000 | 48,750,000 | \( 162,500,000 \cdot 0.70 + 15,000,000 - 20,800,000 - 5,250,000 \) = 97,700,000 | | 2 | 561,800,000 | 330,750,000 | 55,125,000 | 175,925,000 | 52,777,500 | \( 175,925,000 \cdot 0.70 + 15,000,000 - 21,632,000 - 5,512,500 \) = 99,559,500 | | 3 | 595,108,000 | 347,287,500 | 57,881,250 | 189,939,250 | 56,981,775 | \( 189,939,250 \cdot 0.70 + 15,000,000 - 22,469,280 - 5,788,125 \) = 101,771,070 | | 4 | 630,055,480 | 364,051,875 | 60,775,313 | 205,228,292 | 61,568,488 | \( 205,228,292 \cdot 0.70 + 15,000,000 - 23,321,609 - 6,077,281 \) = 104,016,282 | | 5 | 666,211,818 | 381,254,469 | 63,763,042 | 221,194,307 | 66,358,292 | \( 221,194,307 \cdot 0.70 + 15,000,000 - 24,189,719 - 6,381,121 \) = 106,044,679 |
Summary of FCFF Projections:
- Year 1 FCFF = R97,700,000
- Year 2 FCFF = R99,559,500
- Year 3 FCFF = R101,771,070
- Year 4 FCFF = R104,016,282
- Year 5 FCFF = R106,044,679
Step 3: Determine Terminal Value at the End of Year 5
To find the terminal value using the perpetuity growth model:
\[ Terminal\ Value = \frac{FCFF_{5} \times (1 + g)}{WACC - g} \]
Where:
- \( g = 0.03 \) (terminal growth rate)
Substituting the values:
\[ Terminal\ Value = \frac{R106,044,679 \times (1 + 0.03)}{0.10 - 0.03} = \frac{R106,044,679 \times 1.03}{0.07} \]
Calculating:
\[ Terminal\ Value = \frac{R109,227,878.37}{0.07} = R1,560,398,515.00 \]
Step 4: Estimate the Enterprise Value of HBM Corp
To find the enterprise value, we will discount the FCFF and the terminal value back to the present value using the WACC of 10%.
Present Value (PV) of FCFFs:
\[ PV(FCFF) = \sum_{t=1}^{5} \frac{FCFF_{t}}{(1 + WACC)^{t}} + \frac{Terminal\ Value}{(1 + WACC)^{5}} \]
Calculating each term:
- Year 1: \( \frac{97,700,000}{(1.10)^1} \approx R88,818,182.00\)
- Year 2: \( \frac{99,559,500}{(1.10)^2} \approx R82,845,620.00\)
- Year 3: \( \frac{101,771,070}{(1.10)^3} \approx R76,787,022.00\)
- Year 4: \( \frac{104,016,282}{(1.10)^4} \approx R71,649,555.00\)
- Year 5: \( \frac{106,044,679}{(1.10)^5} \approx R67,274,756.00\)
- Present Value of Terminal Value (at Year 5): \[ \frac{1,560,398,515}{(1.10)^5} \approx R970,243,085.00 \]
Total Enterprise Value:
Adding up the present values:
\[ EV = R88,818,182.00 + R82,845,620.00 + R76,787,022.00 + R71,649,555.00 + R67,274,756.00 + R970,243,085.00 \]
\[ EV \approx R1,377,018,670.00 \]
Thus, the estimated enterprise value of HBM Corp is approximately R1,377,018,670.00.
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