Reference no: EM133072914

ABC Corp. has the following accounting and financial information at the most recent time/period:

 

Free cash flow to the firm = $200 million 

 

Free cash flow to creditors = $80 million

 

Current ratio = 0.75

 

Return on Assets = 20%

 

Debt to Equity ratio = 0.20

 

Dividend payout ratio = 0.625

 

ABC Corporation has 5 million shares of common stock outstanding and 1 million bonds with 5.0 percent coupon rate that pay coupons semiannually and have par value $1,000 each. The common stock has a beta of 2.0. The bonds have 25 years to maturity and sell for $351.259. The expected return on the market portfolio is 19 percent, T-bills are yielding 2 percent, and the firm's current tax rate is 20 percent.

 

1. What would be the effect on the current ratio AND asset turnover ratio if the firm purchases new short-term debts by paying cash? Explain why.
2. ABC Corp's FCFF is expected to grow at a 20 percent for the next 2 years and then grow at the forecast rate from the accounting information indefinitely. What would be the ABC Corp.'s stock price according to the FCFF approach?
3. ABC Corp.'s FCFE is expected to grow at a 20 percent for the next 2 years and then grow at the forecast rate from the accounting information indefinitely. What would be the ABC Corp.'s stock price according to the FCFE approach?