III. Free Cash Flow Valuation Goodyear Industries is considering going public but is unsure of a fair offering price for the company. The firm's CFO has gathered data for performing the valuation usin the free cash flow valuation model. The firm's weighted average cost of capital is 11% and it has P1.5 million of debt at market value and P500,000 o preferred stock at its assumed market value. The
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- Free cash flow valuation Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value. The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. The firm's weighted average cost of capital is 12 %, and it has $3,060,000 of debt at market value and $610,000 of preferred stock in terms of market value. The estimated free cash flows over the next 5 years, 2020 through 2024, are given in the table. Beyond 2024 to infinity, the firm expects its free cash flow to grow by 6 % annually. Year (t) Free Cash Flow (FCF) 2020 $260,000 2021 $330,000 2022 $380,000 2023 $430,000 2024 $480,000 a. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model. b.…Free cash flow valuation Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value. The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. The firm's weighted average cost of capital is 13%, and it has $1,720,000 of debt at market value and $340,000 of preferred stock in terms of market value. The estimated free cash flows over the next 5 years, 1 through 5, 1 230,0002 270,0003 330,0004 360,0005 420,000After year 5, the firm expects its free cash flow to grow by 3% annually. a. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model. b. Use your finding in part a, along with the data provided above, to find Nabor Industries' common stock value. c. If…Free cash flow valuation Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value. The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. The firm's weighted average cost of capital is 15 %, and it has $ 1,670,000 of debt at market value and $ 330,000 of preferred stock in terms of market value. The estimated free cash flows over the next 5 years, 2020 through 2024, are given in the table, Year (t) Free cash flow (FCF) 2020 $230,000 2021 $260,000 2022 $330,000 2023 $370,000 2024 $440,000 Beyond 2024 to infinity, the firm expects its free cash flow to grow by 5% annually. a. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model. b. Use your finding in part a,…
- (b) The Chief financial officer of Kurdishy Oil has given you the assignment of estimating thefirm’s cost of capital. The present capital structure, which is considered optimal, is as follows:Market ValueDebt $40 millionPreferred stock 5 millionCommon equity 55 millionThe anticipated financing opportunities are:1) Debt can be issued with a 15 percent before-tax cost.2) Preferred stock will be $100 par, carry a dividend of 13 percent, and can be sold at $96per share.3) Common equity has a beta of 1.20, rM = 17% and rf = 12%.Kurdishy’s tax rate is 40%.(i) Calculate the after-tax cost of debt, cost of preferred stock and cost of equity of GalaxyOil. (ii) What is the cost of capital of Kurdishy Oil? (iii) The CEO of Kurdishy asks you about the company’s capital structure. She wants toknow why the company doesn't use more preferred stock financing as it costs less thandebt. What would you tell the president? [Note: Confine your answer to no more acouple of lines.]Based on the free cash flow valuation model, you estimate Tigers Construction's value of operations is $750 million. Its balance sheet shows $50 million of short-term investments that are unrelated to operations, $100 million of accounts payable, $100 million of notes payable, $200 million of long-term debt, $40 million of common stock, and $160 million of retained earnings. Tigers has 10 million shares of stock outstanding. What is the best estimate for the stock price per share ? a. $45.1 b. $52.5 c. $47.5 d. $50.0 e. $42.9A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $38 $53 $58 $63 $ 63 Selling price $ 756 Total free cash flows $38 $53 $58 $63 $ 819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…
- A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $38 $53 $58 $63 $ 63 Selling price $ 756 Total free cash flows $38 $53 $58 $63 $ 819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…Summarize and discuss the implications of the findings for the business or potential business transaction. ---------------- McCaffrey's Inc. has never paid a dividend, and when the firm might begin paying dividends is not known. Its current free cash flow (FCF) is $100,000, and this FCF is expected to grow at a constant 7% rate. The weighted average cost of capital (WACC) is 11%. McCaffrey's currently holds $325,000 of non-operating marketable securities. Its long-term debt is $1,000,000, but it has never issued preferred stock. McCaffrey's has 50,000 shares of stock outstanding. McCaffrey's value of operations - $2,675,000 The company's total value - $3,000,000 The estimated value of common equity - $2,000,000 The estimated per-share stock price - $40Bakery co. make these assumptions for valuation purposes: a. The firm consists of a single asset that will generate pretax net cash flows of P3,000,000 per year forever. b. The income tax rate is 25%. c. After making paying taxes, the firm pays dividends to distribute any remaining cash flows to the equity shareholders each year. d. Equity shareholders have financed the asset entirely with P100,000,000 of equity capital. e. The cost of equity capital is 12%. 1. Compute for the dividend amount each year to the shareholders. 2. Compute for the dividend amount each year to the shareholders.
- A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $33 $48 $53 $58 $ 58 Selling price $ 696 Total free cash flows $33 $48 $53 $58 $ 754 To finance the purchase, the investors have negotiated a $480 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…National Co. make these assumptions for valuation purposes:a. The firm consists of a single asset that will generate pretax net cash flows of P3,000,000 per year forever.b. The income tax rate is 25%.c. After making paying taxes, the firm pays dividends to distribute any remaining cash flows to the equity shareholders each year.d. Equity shareholders have financed the asset entirely with P100,000,000 of equity capital.e. The cost of equity capital is 12%.Compute for the value of the firm to the shareholders using dividend discount model?National Co. make these assumptions for valuation purposes:a. The firm consists of a single asset that will generate pretax net cash flows of P3,000,000 per year forever.b. The income tax rate is 25%.c. After making debt service payments and paying taxes, the firm pays dividends to distribute any remaining cash flows to the equity shareholders each year.d. The equity shareholders finance a portion of the investment in the asset with P60,000,000 of equity capital. (Equity ratio = 6/10 = 60%)e. The firm finances the remainder of the asset using P40,000,000 of debt capital. (Debt ratio = 40% = 4/10)f. This amount of debt in the firm’s capital structure does not alter substantially the risk of the firm to the equity investors, so they continue to require a 12% rate of return.g. The debt is issued at par, and it is less risky than equity; so the debt-holders demand interest of only 7% each year, payable at the end of each year.h. Interest expense is deductible for income tax…