Target capital structure of debt-value ratio

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Navarro had sales of $630 million in 2012. Suppose you expect its sales to grow at an 8% rate in 2013, but that this growth rate will slow by 2% per year to a long-run growth rate for the industry of 2% by 2016. Based on Navarro's past profitability and investment needs, you expect EBIT to be 10% of sales, increases in net working capital requirements to be 8% of any increase in sales, and capital expenditures to equal depreciation expenses. If Navarro has $125 million in cash, $10 million in debt, 25 million shares outstanding, a tax rate of 35%, and a weighted average cost of capital of 12.0%.

a. What is your estimate of the value of Navarro's stock in early 2013?

b. Navarro plans to follow a target capital structure of debt-value ratio of 25% with the cost of debt 10%. What is the value of equity and price per share if the unlevered cost of equity is 14%?

Reference no: EM131548734

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