Reference no: EM132915447

Problem - A mutual fund manager is evaluating ABC Company by using the FCFF and FCFE valuation approaches. The analyst has collected the following information:

ABC Company has net income of $250 million, deprecation of $90 million, capital expenditures $170 million, and an increase in working capital of $40 million.

ABC Company will finance 40 percent of the increase in net fixed assets (capital expenditure less deprecation) and 40% of the increase in working capital with debt financing.

Interest expenses are $150 million. The current market of the company's outstanding debt is $1,800 million.

FCFF is expected to grow at 6.0% indefinitely, and FCFE is expected to grow at 7.0% indefinitely.

Tax rate is 30%.

ABC Company is financed with 50% debt and 60% equity. The before-tax cost of debt is 9%, and the before-tax cost of equity is 13%.

ABC Company has 10 million outstanding shares.

a. Using the FCFF valuation approach, estimate (1) the total value of the firm, (2) the total market value of equity, (3) the per-share valuate of equity.

b. Using the FCFE valuation approach, estimate (1) the total market value of equity and (2) the per-share of equity.