Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.16. Its current stock price is $45 per share, with 2.3 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of 0.4 and can borrow at 4.0%, just 20 basis points over the risk-free rate of 3.8%. The expected return of the market is 9.6%, and PKGR's tax rate is 22%. a. This year, PKGR is expected to have free cash flows of $5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price? b. PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.4, it believes its borrowing costs will rise only slightly to 4.3%. If PKGR announces that it will raise its debt-equity ratio to 0.4 through a leveraged recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings. a. This year, PKGR is expected to have free cash flows of $5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price? %. (Round to two decimal places.) The constant expected growth rate of free cash flow is consistent with its current stock price is
Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.16. Its current stock price is $45 per share, with 2.3 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of 0.4 and can borrow at 4.0%, just 20 basis points over the risk-free rate of 3.8%. The expected return of the market is 9.6%, and PKGR's tax rate is 22%. a. This year, PKGR is expected to have free cash flows of $5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price? b. PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.4, it believes its borrowing costs will rise only slightly to 4.3%. If PKGR announces that it will raise its debt-equity ratio to 0.4 through a leveraged recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings. a. This year, PKGR is expected to have free cash flows of $5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price? %. (Round to two decimal places.) The constant expected growth rate of free cash flow is consistent with its current stock price is
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter15: Capital Structure Decisions
Section: Chapter Questions
Problem 11P: The Rivoli Company has no debt outstanding, and its financial position is given by the following...
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Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.16. Its current stock price is $45 per share, with 2.3 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of 0.4 and can borrow at 4.0%,
just 20 basis points over the risk-free rate of 3.8%. The expected return of the market is 9.6%, and PKGR's tax rate is 22%.
a. This year, PKGR is expected to have free cash flows of $5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price?
b. PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.4, it believes its borrowing costs will rise only slightly to 4.3%. If PKGR announces that it will raise its debt-equity ratio to 0.4 through a leveraged recap, determine the increase
or decrease in the stock price that would result from the anticipated tax savings.
a. This year, PKGR is expected to have free cash flows of $5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price?
%. (Round to two decimal places.)
The constant expected growth rate of free cash flow is consistent with its current stock price is
Transcribed Image Text:Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.16. Its current stock price is $45 per share, with 2.3 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of 0.4 and can borrow at 4.0%,
just 20 basis points over the risk-free rate of 3.8%. The expected return of the market is 9.6%, and PKGR's tax rate is 22%.
a. This year, PKGR is expected to have free cash flows of $5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price?
b. PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.4, it believes its borrowing costs will rise only slightly to 4.3%. If PKGR announces that it will raise its debt-equity ratio to 0.4 through a leveraged recap, determine the increase
or decrease in the stock price that would result from the anticipated tax savings.
a. This year, PKGR is expected to have free cash flows of $5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price?
%. (Round to two decimal places.)
The constant expected growth rate of free cash flow is consistent with its current stock price is
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