Reference no: EM132756237
Question: ABC Ltd, a construction company, earned $5 million in after-tax operating income in the most recent year. The firm also had fixed cost investment (ie cash involvement related to the capital expenditure for the year) of $4 million and depreciation of $2 million during the year. Working capital at the end of the year was $10 million. The firm also had $15 million in outstanding debt and a pretax cost of debt of 8%. There were 10 million shares outstanding trading at $2 per share, and the most recent beta is 1.10. The tax rate for the firm is 40%, the treasury bond rate is 7% and return on the market is 12.5%.
a) Estimate the firm's weighed average cost of capital (WACC).
b) Assuming that the firm's operating income will grow 10 percent for the next three years, and that the fixed cost investment, depreciation, and working capital will grow at the same rate, estimate the FCFF and its present value for each year over this period. As an option, you may use a table to answer this question.
c) Assuming that after the next three years the firm will reach a stable-growth period and the outstanding debt will reduce to $7.5 million with no change in cost of debt, estimate the firm's new beta and the WACC during this stable-growth stage.
d) Assuming that in this stable-growth period the growth rate indicated in part (b) will drop to 4%, estimate the terminal value of the FCFF.
e) Estimate the current total value of the firm.
f) Estimate the current value of equity of the firm.
g) Estimate the value per share of the firm.
h) Suggest whether to buy, hold or sell the stock.
|
Merger is significant change for both organizations
: The merger is a significant change for both organizations; there is growing anxiety and uncertainty among the employees of both organizations.
|
|
What is the impact of leverage on a firms profits
: Bob and Sarah are thinking of starting up a business. They will need to purchase around 100k of equipment, supplies, and for working capital.
|
|
What is the market value of the company
: Solo Inc. is proposing a rights offering. Presently there are 264,000 shares outstanding at $81 each. There will be 66,000 new shares offered at $54 each.
|
|
What is the value of the stream of lottery payments
: On December 11, 2008 your client won $37.5 million in the lottery. The lottery commission gave them the option of receiving a lump sum or a 20-year annuity.
|
|
Estimate the current total value of the firm
: ABC Ltd, a construction company, earned $5 million in after-tax operating income in the most recent year. The firm also had fixed cost investment.
|
|
What is the consolidated net income
: Planet issued $10,000 of 8% bonds on January 1, 2019 at par. The bonds mature in 10 years and pay interest annually on December 31. Star purchased the bonds.
|
|
Find the one for the last interest payment
: Assume you have the long GBP positiontwo difference checksGroup of answer choices in a 6-Year at-market fixed-for-fixed USD/GBP currency swap.
|
|
Calculate blossoms actual return on plan assets
: For Blossom Corporation, year-end plan assets were $1,700,000. At the beginning of the year, plan assets were $1,300,000. During the year, contributions to the.
|
|
Calculate the npv of this switch
: First Inc. currently grants no credit, but it is considering offering new credit terms of net 30. As a result, the price of its product will increase from $40.
|