Firm equity using three-stage model with linear transition

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Reference no: EM131911035

1. Oberon, Inc., has a $35 million (face value) 10-year bond issue selling for 94 percent of par that pays an annual coupon of 8.20 percent.

What would be Oberon’s before-tax component cost of debt?

2. A company currently has earnings (E0) of $2.00 and a dividend (D0) of $0.50. The firm’s current return on equity (ROE) is 30%. The firm will maintain the same dividend payout and ROE over the next two periods. Then it will transition in a linear reduction in years 3, 4, and 5 to a growth of 3%. The firm will then grow at 3% to perpetuity. The firm’s beta is presently 1.6, but this will transition to 1 over the same period. The risk-free rate is 4% and the market risk premium is 6%. ROE is expected to be 10% beginning in year 5 to perpetuity. What is the present value of this firm’s equity using a three-stage model with linear transition in years 3, 4, and 5? Can someone show me how to work this out?

Reference no: EM131911035

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