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Question - You would like to value the stock of company XYZ. XYZ has 10 million shares outstanding. In addition to equity, the company also has 180,000 bonds. Each bond has a face value of £1,000 and trades at a price of £959. The cost of debt is 7%. The target capital structure is 25% debt and 75% equity. You have the following information on XYZ for the year 2020: (1) Sales are £500 million (2) Cost of goods sold (COGS) excluding depreciation is 50% of sales (3) Depreciation and amortization is £50 million (4) Capital expenditure is £80 million (5) Net working capital in December 2019 is equal to £250 million and net working capital in December 2020 is equal to £300 million (6) Total unlevered free cash flows are projected to grow at 10%, 7%, 4% rate in 2021, 2022, and 2023, respectively. Then the growth rate will remain flat at 3.5% per year forever. Assume that the corporate tax rate is 40%. Assume also that CAMP holds for equity capital, the risk free interest rate is 4%, and the expected market return is 11%.
Required - Calculate the value of the intermediate cash flow at the beginning of 2021. Calculate the terminal value of XYZ at the beginning of 2021. Estimate the value per share of XYZ at the beginning of 2021.
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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