Assume that an analyst has examined your company and has estimated that the free cash flow at the end of the year (Year 1) will be $450 million, that this free cash flow will grow at a constant rate of 8 percent per year, and that your company's weighted average cost of capital is 12 percent. If the company currently has debt and preferred stock totaling $4.500 million (4.5 billion), and if there are 200 million outstanding shares of common stock, then determine what the intrinsic value of the company's stock should be today (Year O) on a per share basis.
Assume that an analyst has examined your company and has estimated that the free cash flow at the end of the year (Year 1) will be $450 million, that this free cash flow will grow at a constant rate of 8 percent per year, and that your company's weighted average cost of capital is 12 percent. If the company currently has debt and preferred stock totaling $4.500 million (4.5 billion), and if there are 200 million outstanding shares of common stock, then determine what the intrinsic value of the company's stock should be today (Year O) on a per share basis.
Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Chapter13: Valuation: Earnings-based Approach
Section: Chapter Questions
Problem 7QE
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Transcribed Image Text:Assume that an analyst has examined your company and has estimated that the free cash flow at the
end of the year (Year 1) will be $450 million, that this free cash flow will grow at a constant rate of 8
percent per year, and that your company's weighted average cost of capital is 12 percent. If the
company currently has debt and preferred stock totaling $4,500 million (4.5 billion), and if there are
200 million outstanding shares of common stock, then determine what the intrinsic value of the
company's stock should be today (Year O) on a per share basis.
O $35.00
O$37.50
O $29.25
$31.00
$33.75
Transcribed Image Text:Assume that a firm starts out as an all equity firm with $1,000,000 of equity, $1,000,000 of assets,
and a return on assets (ROA) of 10 percent. Also assume that management then makes the decision
to issue $200,000 of debt, at a before-tax rate of 5 percent, and use the proceeds to buy back
$200,000 of equity. Based on this information, and assuming that the firm's tax rate is 40 percent,
determine what the return on equity (ROE) will be after the buy back.
O 10.50%
14.25%
O 11.75 %
13.00%
O 15.50%
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