Question 2: National bank is an all-equity firm with an after-tax operating income of $350 million per annum; it has 200 million outstanding shares. The firm needs $180 million to meet its annual reinvestment target. The firm expects after-tax operating income to grow at the rate of 5% per annum indefinitely and the cost of capital to remain at its current rate of 12% in the foreseeable future. Required: Estimate the market value of the firm and total value per share accruing to existing shareholder, assuming that the company pays all of its free cash flows as dividend.

Question 2: National bank is an all-equity firm with an after-tax operating income of $350 million per annum; it has 200 million outstanding shares. The firm needs $180 million to meet its annual reinvestment target. The firm expects after-tax operating income to grow at the rate of 5% per annum indefinitely and the cost of capital to remain at its current rate of 12% in the foreseeable future. Required: Estimate the market value of the firm and total value per share accruing to existing shareholder, assuming that the company pays all of its free cash flows as dividend.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Part II: Problem solving (30 points): A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions: Source of Capital Long-term debt Preferred stock Common stock equity Target Market Proportions 30% 5 65 Debt: The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A flotation cost of 2 percent of the face value would be required. Preferred Stock: The firm has determined it can issue preferred stock at $65 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $3 per share. Common Stock: The firm's common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year is $5.07. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.45. It is expected that to sell, a new common stock issue must be underpriced at $1 per share and the firm…
2. Assume that today is December 31, 2021 and you need to determine the firm value of CoolTech, Inc. You have decided to apply the free cash flow valuation model to the firm's financial data that you've developed from a variety of data sources. The key values you have compiled are summarized in the following table: Free Cash Flow Year FCF Other Data Growth rate of FCF, beyond 2025 to infinity = 3% Weighted average cost of capital = 8% 700,000 800,000 950,000 980,000 2022 %3D 2023 %3D 2024 2025 What is the value of the entire CoolTech's entire company? + Factac F%
What is the cash cow value and the value of its growth opportunities (NPVGO) if a corporation has current earnings of $5 per share and expects to be able to make an investment of 20% of its earnings next year in a new one-time project with an expected return on invested capital of 24%? The discount rate for the firm is 8%. Cash cow value is $62.50 and NPVGO is $1.85 Cash cow value is $20.83 and NPVGO is $2 Cash cow value is $62.50 and NPVGO is $14 Cash cow value is $25.00 and NPVGO is $3 Cash cow value is $25.00 and NPVGO is $3
You are given the following information for a firm: EBIT this period = $18.7 million Depreciation = $2.5 million Net Working Capital Increase = $0 Asset Beta = 1.4 Capital Expenditures = $3.2 million Growth Rate of FCF = 3% Risk Free Rate = 3% Market Risk Premium = 6.3% Using the above data, what is the present value of all FCF?
Suppose that Portsea Inc. is thinking about acquiring a firm in its industry for $150 million. The acquisition is expected to increase Portsea's free cash flow by $20 million in the first year, and this contribution is expected to grow at a rate of 3% every year thereafter. Assume that Portsea currently maintains a debt-to-equity ratio of 0.80, its corporate tax rate is 30%, its cost of debt is 4%, and its cost of equity is 14% . Further assume that Portsea will maintain a constant debt - equity ratio for the acquisition. What is the free cash flow to equity (FCFE) for the acquisition in year 0 ?
Can I get help with....A Security Company produces a cash flow of $210 per year and is expected to continue doing so in the infinite future. The cost of equity capital is 15 percent, and the firm is financed entirely with equity. Management would like to repurchase $100 in shares by borrowing $100 at a 10 percent annual rate (assume that the debt will also be outstanding into the infinite future). Using Modigliani and Miller’s Proposition 1 answer the following questions.What is the value of the firm today? Value of the firm $enter the dollar value of the firm What is the value of equity after the repurchase? Value of the equity $enter the dollar value of the equity What will be the rate of return on common stock required by investors after the stock repurchase? (Round answer to 2 decimal places, e.g. 17.54%.) Rate of return on common stock enter the rate of return on common stock in percentages rounded to 2 decimal places %
65.) Suppose Buyson Corporation’s projected free cash flow for next year is FCF1 = P150,000, and FCF is expected to grow at a constant rate of 6.5%. If the company’s weighted average cost of capital is 11.5%, what is the firm’s total corporate value?Group of answer choices P3,150,000 P2,572,125P2,707,500 P2,850,000 P3,000,000
Assume a firm is planning to raise €15,000,000 capital from the market. The firm has a long-term and sustainable capital structure policy as follows of 70% equity and 30% debt. Firm’s net income has been projected to be €11, 000, 000. Tasks: Using the residual dividend model answer the following questions: How much would this firm pay dividend per share? What would the payout ratio? What happens if firm’s net income was projected at €5,000, 000 instead of €11,000,000? Or €13,000,000? What are some of the advantages and disadvantages of the residual dividend model? List and explain at least two for each.
Finance A firm's expected free cash flows in year 1, 2, and 3 are $30 million, $35 million, and $40 million respectively. Beyond year 3 the growth is constant at 5%. The cost of equity is 11% and the Weighted average cost of capital is 9%. What is the value of the firm in year 3 (Horizon value)?
Part Two : Solve the following question : Question One : LOFTA Corporation is interested in measuring the cost of each specific type of capital as well as the weighted average cost of capital. Historically, the firm has raised capital in the following manner: Source of capital weight Long term debt 35% Preferred stock 12% Common stock equity 53% The tax rate of the firm is currently 30%. The needed financial information and data are as follows: Debt LOFTA can raise debt by selling $1,000-par-value, 6.5% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $20 per bond needs to be given. There is an associated flotation cost of 2% of par value. Preferred stock Preferred stock can be sold under the following terms: The security has a par value of $100 per share, the annual dividend rate is 6% of the par value, and the flotation cost is expected to be $4 per…
Suppose a firm has a EBIT of $450, Depreciation of $65, taxes of $50, change in NWC of $35, and net capital expenditures of $75. Its FCF are expected to grow constantly indefinitely. The firm has a retention rate of 60%, an ROE of 6.667%, and a WACC of 15%. What is the value of the firm? Assuming the firm's market value of debt is $1,350 and the firm has 98 shares outstanding, what is should the firm's stock price be? Should you buy the stock if it currently sells for $15 per stock?
Estimate your firm’s Weighted Average Cost of Capital. Assume that the current risk-free rate of interest is 3.5%, the market risk premium is 5%, and the corporate tax rate is 21%. Ø Debt: • Total book value: $10 million • Total market value: $12 million • Coupon rate: 6% • Yield to Maturity: 5% Ø Common Stock: • Total book value: $15 million • Total market value: $20 million • Beta = 1.1 Ø Preferred Stock: • Total book value: $2 million • Total market value: $2.5 million • Price per share: $20 • Dividend per share: $1.50 What is your firm’s Weighted Average Cost of Capital (input as a raw number, i.e. if your answer is 7.1%, input 7.1)?

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