Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.23. Its current stock price is $54 per share, with 2.1 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of 0.575 and can borrow at 4.3%, just 20 basis points over the risk-free rate of 4.1%. The expected return of the market is 9.9%, and PKGR's tax rate is 26%. 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 0.575, it believes its borrowing costs will rise only slightly to 4.6%. If PKGR announces that it will raise its debt-equity ratio to 0.575 through a leveraged recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings. Question content area bottom Part 1 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? The constant expected growth rate of free cash flow is consistent with its current stock price is enter your response here%. (Round to two decimal places.)
Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.23. Its current stock price is $54 per share, with 2.1 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of 0.575 and can borrow at 4.3%, just 20 basis points over the risk-free rate of 4.1%. The expected return of the market is 9.9%, and PKGR's tax rate is 26%. 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 0.575, it believes its borrowing costs will rise only slightly to 4.6%. If PKGR announces that it will raise its debt-equity ratio to 0.575 through a leveraged recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings. Question content area bottom Part 1 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? The constant expected growth rate of free cash flow is consistent with its current stock price is enter your response here%. (Round to two decimal places.)
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter15: Capital Structure Decisions
Section: Chapter Questions
Problem 10MC: Liu Industries is a highly levered firm. Suppose there is a large probability that Liu will default...
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Question
Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately
0.23.
Its current stock price is
$54
per share, with
2.1
billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of
0.575
and can borrow at
4.3%,
just 20 basis points over the risk-free rate of
4.1%.
The expected return of the market is
9.9%,
and PKGR's tax rate is
26%.
a. This year, PKGR is expected to have free cash flows of
free cash flow is consistent with its current stock price?
$5.5
billion. What constant expected growth rate of b. PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of
0.575,
it believes its borrowing costs will rise only slightly to
4.6%.
If PKGR announces that it will raise its debt-equity ratio to
0.575
through a leveraged recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings.Question content area bottom
Part 1
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?The constant expected growth rate of free cash flow is consistent with its current stock price is
enter your response here%.
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