Thug Life

8) What would BV's 1988 earnings per share be after all of the above adjustments?

For the purpose of calculating the net present value of the project, an appropriate cost of capital has to be calculated at which free cash flows of the project should be discounted. Since the project will be solely financed by selling new shares, cost of equity will be used as the discount rate. Beta for the company can be assumed to be equal to average of the betas of the competitors of the company. This average beta value comes out to be 1.2. Risk free rate is 0.17% while risk premium has been estimated to be 6%. Thus by putting these values in CAPM formula, we can find the cost of equity for the company which is 7.39%.

To relever the βe, we use the formula, βe = βu +(D/E)*(βu-βd). And the “Target D/E” was found by taking “Target D/V” divided by “1-Target D/V”. So we get the new βe, 1.3576. Then to get cost of equity, we use the CAPM formula, Re=Rf+β(EMRP), 11.7679%. Since we have get the cost of equity and cost of debt, we can determined the WACC, which is equal to Equity/Value*Cost of Equity+Debt/Value*Cost of Debt*(1-tax rate). In the end ,we arrived at 8.48%.

b.What are the amounts and timing of the acquisition investment’s free cash flow from 2013 through 2022?

a.) If you were to sell that same amount of stock in a few years at $55.12 per

11. What is the Cost of Equity? ke = Risk Free Rate + (Beta X Risk Premium of 7.5% points). .03 + (.99 x .075) = 10.43%.

E. Cindy and Rob estimate that the market value of the common equity in the venture is $900,000 at the end of 2010. The market values of interest-bearing debt are judged to be the same as the recorded book values at the end of 2010. Estimate the market value-based weighted average cost of capital for Castillo Products.

a) In the first set of calculations, the staff used a discount rate of 20%, a five-year time horizon, and ignored taxes and terminal value. What is the relative attractiveness of these three alternatives?

11. Managers of POM Corp. wish to maximize the long term share price of the firm. Investors are aware of this. In this situation, if the managers of POM announce an equity issue, investors will conclude that the share price is __A1__. Therefore they will __A2__ the shares at the offered price. Anticipating this condition, the managers would __A3__.

9. You want to purchase a business with the following cash flows. How much would you pay for this business today assuming you needed a 14% return to make this deal?

Break-even Dollar Volume = Total Fixed Costs / Contribution Margin = $525,000 / 0.7111 = $738,282.40

-Martin Industries just paid an annual dividend of $1.30 a share. The market price of the stock is $36.80 and the growth rate is 6.0 percent. What is the firm's cost of equity?

a. What risk-free rate and risk premium did you use to calculate the cost of equity?

Solutions to Valuation Questions 1. Assume you expect a company’s net income to remain stable at $1,100 for all future years, and you expect all earnings to be distributed to stockholders at the end of each year, so that common equity also remains stable for all future years (assumes clean surplus). Also, assume the company’s β = 1.5, the market risk premium is 4% and the 20-30 year yield on risk free treasury bonds is 5%. Finally, assume the company has 1,000 shares of common stock outstanding. a. Use the CAPM to estimate the company’s equity cost of capital. • re = RF + β * (RM – RF) = 0.05 + 1.5 * 0.04 = 11% b. Compute the expected net distributions to stockholders for each future year. • D = NI – ΔCE = $1,100 – 0 = $1,100 c. Use the

Assume the ROE and payout ratio stay the same for the next 4 years. After that competition forces ROE down to 11.5% and the payout increases to 0.8. The cost of capital is 11.5%. (15 points)