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Julio de la Renta, an analyst at Blackwell Investment group is preparing a dividend forecast for Yokohama Industries for the next five years. Julio uses the following model assumptions: Sales are $100 million in the first year. Sales are expected to grow by 20% in the second year, 15% in year three, and 10% in years 4 and 5. Earnings before interest and taxes (EBIT) are 20% of sales in the first and second years, respectively. EBIT is 18% of sales in the third year, and 16% of sales in Years 4 and 5. Interest charges are 10% of total debt for the current year. The income tax rate is 40%. Yokohama pays out 20% of earnings in dividends in the first and second years, 30% in the third year, 40% in Year 4, and 50% in the fifth year. Retained earnings are added to equity in the following year. Total assets are 80% of the current year’s sales in all years. In the first year, debt is 40 million and shareholder’s equity is $40 million. Debt equals total assets less shareholders’ equity. Shareholders’ equity will equal prior year’s shareholders’ equity plus the addition to retained earnings from the prior year. Yokohama has 4 million shares outstanding. The risk-free rate is 4%. The shares of Yokohama have an estimated beta of 1.2, and the equity risk premium is estimated at 6%. The value of the company at the end of the fifth year is expected to be 10 times earnings. Your task is to help Julio de la Renta estimate Yokohama’s current value per share.
Calculate the cost of purchasing the equipment with debt. Calculate the cost of leasing the equipment.
Assume that it is now january 1, 1997. On january 1, 1998, you will deposit $1,000 in to a savings account that pays 8 percent. If the bank compounds interest annually, how much will you have in your account on january 1, 2001? What would your januar..
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The debt consists of 20-year, 8 percent, $1000 bonds, presently selling at $701.25. Flotation costs on new bonds would raise the effective before tax interest cost to 0.5 percent above the yield to maturity on existing debt. At least half of the net ..
Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm currently has four divisions, A through D, with average betas for each division of 0.9, 1.0, 1.6, and 1.7, respectively. What will the WACCs be for each div..
Moore’s Consulting and Crawfish Shack has a before tax WACC of 14% and an After-tax WACC of 10%. A professional business valuation firm valued this business at $2,800,000. The cash flows to the firm’s assets were assumed to be a constant perpetuity..
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