User Account

All Pages

You have been asked to value a firm with expected annual

Assignment Help Finance Basics
Reference no: EM13479489

Exercise 1

You have been asked to value a firm with expected annual after-tax cash flows, before debt payments, of $100 million a year in perpetuity. The firm has a cost of equity of 10%, a market value of equity of $750 million and a market value of debt of $500 million (this is also the book value). The debt is perpetual and the after-tax interest rate on debt is 5%. The company has no non-operating activities.

a. Estimate the value of the firm and the value of the equity based upon this value.

b. Estimate the value of equity, by discounting the cash flows to equity at the cost of equity.

c. Now assume that you had been told that the market value of equity was $850 million and that all of the other information remained unchanged. Answer parts a and b, using these new values.

d. In practice, what needs to happen for the two valuation approaches (FCFF and FCFE) to give the same estimate of value?

Exercise 2

a. Using the financial statements and other information that you have for MPR, and assuming a 5% perpetual growth rate in the FCFE, value the equity using the FCFE method.

b. Does this value equal the estimated value using the FCFF method? Why or why not?

Exercise 3

IO Taxes Inc. is a large but privately-held all-equity firm in the tax planning industry. The firm has been enjoying a nice 20% annual growth in its FCFE due to the highly anticipated increase in taxes related to the massive baby-boomers retirement wave. IO's FCFE is expected to be $5 million next year. The growth rate is expected to be the same for an additional year after that and then management expects the FCFE's growth rate to cool down to 4% in perpetuity.

IO Taxes has 10 million shares outstanding and it has $10 million in non-operating cash (invested mostly in Treasury bills).

While IO Taxes is not publicly traded, its close competitor, H&R Rock Inc., is and has an unlevered and unadjusted equity beta of 1.3.

Additional market information:

Market risk premium: 5.5%

T-bond yield: 3.50%

a. Based on the available information, please estimate IO's cost of equity.

b. Estimate the intrinsic value of each share of stock.

Reference no: EM13479489

Questions Cloud

Plan a is an all common equity structure with 24 million : plan a is an all common equity structure with 2.4 million being raised by selling 80000 shares of common stockplan b
What is the annual opportunity cost of a checking account : problem set 11.thomas franklin arrived at the following tax informationgross salary 46660 interest earnings 225dividend
Offer strategic and tactical plans to implement the : offer strategic and tactical plans to implement the following1. the benefits of delegating2. signs that you should do
Pharmaceutical companies sometimes decide to conduct : critical response questionsbe sure to carefully read each question and answer each part of the question. remember that
You have been asked to value a firm with expected annual : exercise 1you have been asked to value a firm with expected annual after-tax cash flows before debt payments of 100
Which of the following statements accurately describes a : 1. which of the following statements accurately describes a reason for the suitability of an asset class in a qualified
How do you make individualized connections to your students : 1. how do you make individualized connections to your students via online learning?2. how do you increase student
How can a manager reach the organizations tipping point : how can a manager reach the organizations tipping point without extra resources?what skills do you have that you think
What are the three most important issues child development : what are the three most important issues child development professionals will need to address for young children and

Reviews

Write a Review

Finance Basics Questions & Answers

  Financial reporting and analysis

Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..

  A report on financial accounting

This report is specific for a core understanding for Financial Accounting and its relevant factors.

  Describe the types of financial ratios

Describe the types of financial ratios and other financial performance measures that are used during venture's successful life cycle.

  Differences between sole proprietorship and corporation

Briefly describe the major differences between a sole proprietorship and a corporation

  Prepare a cash budget statement

Calculate the expected value of the apartment in 20 years' time. What is the mortgage loan repayment at the beginning of each month

  What are the implied interest rates

What are the implied interest rates in Europe and the U.S.?

  State pricing theory and no-arbitrage pricing theory

State pricing theory and no-arbitrage pricing theory

  Small business administration

Identify the likely stage for each venture and describe the type of financing each venture is likely to be seeking and identify potential sources for that financing.

  Effect of financial leverage

The Effect of Financial Leverage and working capital management

  Evaluate the basis for the payment to the lender

Evaluate the basis for the payment to the lender and basis for the payment to the company-counterparty.

  Importance of opps, ipps, mpfs and dmepos

Research and discuss the differences and importance of : OPPS, IPPS, MPFS and DMEPOS.

  Time value of money

Time Value of Money project

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd