Reference no: EM132775069
Questions -
Q1. Before finalizing the deal, Christine needs to feel confident she is not overpaying. She estimates the cash flows Smith Brothers will generate over the next 4 years and then estimates a terminal value in year 5 that represents the company's value into perpetuity. The total cash flows she calculates from the three divisions (commercial fishing, wholesale seafood sales, and retail/restaurant sales) are as follows: $100,000, $150,000, $200,000, $300,000, $3,600,000.
If Christine has a cost of capital of 13 percent, how much are these future cash flows worth today?
Q2. Smith Brothers is a small company and it isn't publicly traded, but Christine wants to make sure that she understands the appropriate cost of equity to be used for her new company. When evaluating the three divisions, she found 5 publicly traded companies for the pure play method and the average beta was 1.44. She wants to determine the expected return on the market and believes there is a 25% probability of a recession when stocks are likely to lose 4%, a 50% chance of a normal economy when stocks will earn 10%, and a 25% probability that the economy will boom and earn 16%. The risk-free rate is 2.2 percent. What is the cost of equity after using the CAPM and adding 6% for the small equity size premium?
Q3 Smith Brothers doesn't issue bonds yet because it is a small, private C-Corporation but financial managers still need to figure out what the appropriate cost of debt will be. Since Lighthouse Bank is lending Christine the money for the revolving line of credit and they know her character, they are also offering to provide long-term loans for future project financing at a rate slightly above the WSJ Prime Rate of 3.25%. The bank loan committee assigns credit risk premiums of 2% for companies like this. What is the after-tax cost of debt for Smith Brothers?