Reference no: EM133072777

ABC Inc. is a newly public firm with 10 million shares outstanding. You are doing a valuation of ABC. You estimate its free cash flow in the coming year (year 1) to be $16.5 million, and you expect the firm's free cash flows to grow by 4.5% per year in subsequent years. Because the firm has only been listed on the stock exchange for a short time, you do not have an accurate assessment of ABC's equity beta. However, you do have beta data for UAL, another firm in the same industry:

Equity Beta: 1.75

Debt Beta: 0.2

Debt-Equity Ratio: 1.25

ABC plans to raise debt of $100 million at an interest rate of 7%. The debt is repayable in one installment at the end of five years. ABC's corporate tax rate is 40%, the risk-free rate is 5%, and the expected return premium on the market is 6%. Use this information to answer the following questions.

A. Estimate UAL's unlevered equity beta. Answer must be rounded up to two decimal places.

B. UAL's unlevered cost of capital. Answer in %, rounded up to two decimal places.

C. What is ABC's unlevered value? Answer in $ million, rounded up to two decimal places.

D. What is ABC's enterprise value in $ million? Answer must be rounded up to two decimal places.

E. Estimate ABC's share price. Answer must be rounded up to two decimal places.

F. For this part also assume ABC's debt is going to remain constant at $100 million. What is ABC's cost of equity. Answer in %, rounded up to two decimal places.

G. For this part assume ABC's debt is going to remain constant at $100 million. What is the WACC at the beginning of the project. Answer in %, rounded up to two decimal places.