Answered: Allam’s Corporation had the following…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 22P

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Question

100%

Allam’s Corporation had the following figures in 2019:

-Interest rate on loan debt is 14%

-Tax Rate is 20%

-Total liabilities are 2,000,000

-Total assets are 5,000,000

-Risk-free rate of return is 15%

-Beta for the company is 1.2

-Average Market return is 25%

The company is evaluating two projects; S & N that are expected to generate the following:

Year	S	N
0	(500,000)	(500,000)
1	240,000	170,000
2	230,000	200,000
3	190,000	250,000
4	140,000	290,000

Required:

Calculate the Weighted Average Cost of Capital
Using payback, discounted payback, and net present value techniques, which project would you recommend, if any?

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Assume that today is December 31, 2019, and that the following information applies to Abner Airlines: After-tax operating income [EBIT(1 - T)] for 2020 is expected to be $650 million. The depreciation expense for 2020 is expected to be $70 million. The capital expenditures for 2020 are expected to be $250 million. No change is expected in net operating working capital. The free cash flow is expected to grow at a constant rate of 7% per year. The required return on equity is 15%. The WACC is 11%. The firm has $198 million of non-operating assets. The market value of the company's debt is $3.450 billion. 330 million shares of stock are outstanding. Using the corporate valuation model approach, what should be the company's stock price today? Do not round intermediate calculations. Round your answer to the nearest cent.
Assume that today is December 31, 2019, and that the following information applies to Abner Airlines: After-tax operating income [EBIT(1 - T)] for 2020 is expected to be $550 million. The depreciation expense for 2020 is expected to be $70 million. The capital expenditures for 2020 are expected to be $325 million. No change is expected in net operating working capital. The free cash flow is expected to grow at a constant rate of 6% per year. The required return on equity is 14%. The WACC is 11%. The firm has $206 million of non-operating assets. The market value of the company's debt is $4.799 billion. 70 million shares of stock are outstanding. Using the corporate valuation model approach, what should be the company's stock price today? Do not round intermediate calculations. Round your answer to the nearest cent. $ Answer is NOT 204.4 or 204.39

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