How would re and weighted-average cost of capital change

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Question: ‘The sauce', a well-known pizza factory, have asked you to evaluate the factory free cash flow (FCF) activity. You have estimated that the FCF of the factory is $4,500,000, its WACC is 12.5% and its estimated growth is 5% each year. If you know that ‘The sauce' debt is $19,000,000 and it has 6,500,000 outstanding shares, what should be the share's price? Repeat the question by using mid-year discounting as well.

1. XYZ Corp. has just paid a dividend of $5 per share. You think this dividend will grow at 8% per year. If you think the correct discount rate for the dividend stream of XYZ is 25%, how much should you be willing to pay for the stock?

2. You just bought a share of ABC Corp. for $28. The company has just paid a dividend of $2 per share, and you anticipate that this dividend will grow at a rate of 12% per year. What is your implied cost of equity for ABC?

3. You are considering purchasing a stock of ABC Corp, which has just paid a $3 annual dividend per share. The company does not repurchase any of its shares. You anticipate that the company's dividends will grow at a rate of 20% per year for the next 5 years. After this time, you think that the growth of the annual dividends will slow to 5% per year. If your cost of equity for ABC is 10%, what price should you be prepared to pay for the stock?

4. Suppose that a firm is financed with 70% equity and 30% debt. The interest rate on debt is 8%, and the expected return on the common stocks is 17%. The firm's tax rate is 40%. What is the firm's weighted average cost of capital?

5. are given the following information for Twin Inc.

1008_ER.png

a) Calculate Twin Inc.'s weighted-average cost of capital (assuming that the firm pays no taxes).

b) How would rE and the weighted-average cost of capital change if Twin Inc.'s stock price falls to $25 due to declining profits? Assume that business risk is unchanged.

Reference no: EM131477113

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