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Third Cup is considering purchasing Canadian Tea Inc. (CT). Third Cup, a high-end food and beverage ...

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Third Cup is considering purchasing Canadian Tea Inc. (CT). Third Cup, a high-end food and beverage ...

Third Cup is considering purchasing Canadian Tea Inc. (CT). Third Cup, a high-end food and beverage retailer, has been provided with the following information for Canadian Tea, for the next year.

Expected values for CT next year:	($)
EBIT	7,440,000
Interest payments	744,000
Depreciation and amortization expense	372,000
Deferred taxes	186,000
Increase in net working capital	744,000
Net capital expenditures	558,000

Corporate tax rate

42%

Third Cup has asked you to conduct the following analysis:
a) Estimate Canadian Tea's free cash flow to equity for next year.
b) Estimate the total value of Canadian Tea's equity, as well as on a per-share basis.

For purposes of this problem assume the following:

(i)	A constant annual growth rate of free cash flow of 4.3% indefinitely

(ii)	Canadian Tea has 650,000 shares outstanding.

(iii)

The appropriate beta is 1.12.

(iv)	The expected market return is 9.8 percent.

(v)	The risk-free rate is 3.6 percent.

Textbook

Corporate Finance

Edition: 5^th

Author: Booth

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